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Southeast Asia Virus Hotspots Indonesia, Philippines Cut Rates in Surprise

Grace Sihombing, Claire Jiao, Siegfrid Alegado and Ditas Lopez
·4 min read

(Bloomberg) -- The two countries grappling with Southeast Asia’s worst coronavirus outbreaks unleashed more monetary easing in unexpected moves, and pledged to keep policy accommodative moving forward.

Bank Indonesia lowered its key rate Thursday by 25 basis points to 3.75%, its first cut in four months, as 11 of 26 economists surveyed by Bloomberg predicted. Minutes later, Bangko Sentral ng Pilipinas cut by the same amount to 2.0%, as only five of 18 economists expected.

Policy makers in both countries said monetary settings would remain supportive for growth, with Philippine central bank Governor Benjamin Diokno saying he’s ready to use all available tools after a string of typhoons added to the economy’s challenges. Recent gains in both currencies against the U.S. dollar helped create a window for additional easing.

“The two cuts today reflect that supporting economic recovery is top on the agenda, especially amid lingering virus cases,” said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. in Singapore. “Recent currency strength has reduced concern over the implications of lower rates.”

What Bloomberg Economics Says...

“Both central banks appear cognizant that the road to full recovery remains long and uncertain, even with the prospect of a vaccine soon to come. That likely keeps rate cuts in the pipeline next year.”

Tamara Mast Henderson, Asean economist

The Indonesian rupiah fell 0.6% to 14,155 against the U.S. dollar as of market close. Indonesian stocks were up 0.7%, posting their fifth straight day of gains. The Philippine peso closed down 0.2% at 48.315 before the decision, while the country’s benchmark stock index dropped 0.8%.

Previous cuts in both countries have had only limited success in boosting credit growth, as high numbers of daily infections keep businesses and consumers cautious. Each country has recorded more than 400,000 Covid-19 cases, the two largest outbreaks in Southeast Asia.

Indonesia

Bank Indonesia’s move comes after Southeast Asia’s largest economy contracted more than expected last quarter, falling into its first recession since the Asian financial crisis more than two decades ago. Indonesian policy makers hope the economy can eke out some growth in the fourth quarter, even though recent vital indicators -- including consumer confidence, retail sales, imports and manufacturing -- suggest that will be difficult.

“I can assure you that the economic recovery will continue,” Bank Indonesia Governor Perry Warjiyo said. “We encourage banks and the business community to build optimism so the economic recovery can continue, and at a quick pace.”

Philippines

Many economists were expecting the Philippine central bank to stay on hold while assessing the effectiveness of past easing steps. The BSP also has implemented credit relief and other liquidity measures in response to the pandemic amid limited fiscal stimulus.

“People will be much more likely to have confidence to get into the financial system again when interest rates are on the accommodative side,” said Francis Dakila, deputy governor of the Philippine central bank. Thursday’s cut “will help speed up process of recovery.”

Both central banks “likely used the opportunity of firming currencies, low inflation, the passage of U.S. elections and lower market volatility overall, to help provide further support to the nascent recovery that is already taking shape in both economies,” said Mitul Kotecha, a senior emerging markets strategist at TD Securities in Singapore.

Differences

Despite the similarities in Thursday’s decisions, the two central banks find themselves in different predicaments, according to Nicholas Mapa, senior economist at ING Groep NV in Manila.

Indonesia “looks like it’s headed toward a decent rebound in activity as it works to secure vaccines and bolster growth via fiscal spending,” he said. Meanwhile, “the Philippine economy appears headed deeper into recession with fiscal stimulus largely absent even after severe storm damage caused by typhoons.”

With its key rate at 3.75%, Bank Indonesia has far more space left for additional easing than its Philippine counterpart.

“Rate cuts in Indonesia will likely help bolster bank lending, while fading economic momentum will likely weigh on Philippine loan activity no matter how many times Bangko Sentral cuts,” Mapa said. “It’s a very interesting dynamic, a tale of two central banks and economies.”

(Recasts lead)

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