Bank Indonesia Raised Its Policy Rates by 50bps in June

In the Philippines, the country’s inflation rose sharply to 5.2% yoy in June, from 4.6% in May, due to higher costs of alcohol and tobacco, transport and prices of food. Bangko Sentral ng Pilipinas (BSP) raised its policy rates in May and June to 3.50% to rein inflation closer to its mid-range of the target of 2-4% in 2018. BSP believes upside inflation risks will continue to prevail, stating that “the impact of international oil and commodity price movements on overall inflation is expected to be stronger given prevailing robust aggregate demand conditions.”

Bank Indonesia (BI) hiked its 7-days reverse repo rate for the third time this year by 50bps to 5.25% in its June monetary policy meeting in a bid to support the Rupiah, which has depreciated by 4.1% against the US Dollar in 2Q18 (weakened by 1.5% in 1Q18). The policy rate is now at its highest since August 2016 and following the two 25bps rate hikes in May. The deposit facility rate and lending facility rate were also raised by 50bps each to 4.50% and 6.00%, respectively. BI guided that the rate hike was a “pre-emptive, front-loading, and ahead of the curve move to maintain the domestic financial market’s competitiveness against several countries’ changing monetary policies as well as high global uncertainty.”

On the inflation front, Indonesia’s headine inflation improved for the second straight month to 3.1% yoy in June from 3.2% in May. This was its slowest pace since December 2016 due to the high base effect from last year’s Ramadan. Going forward, while we believe the 100bps increase in the policy rate so far this year will likely keep inflation contained and within BI’s inflation target of 2.5-4.5%, there is also the possibility of BI raising its policy rate further, but gradual, in view of the uncertainty on Rupiah.

Meanwhile, Thailand’s inflation eased to 1.4% yoy in June from 1.5% in May mainly due to the improvement in prices of food and non-alcoholic beverages. Bank of Thailand (BOT) has kept its current policy rate of 1.50% since April 2015, given subdued inflation pressures and inflation at the lower end of its target range of 1-4%.

Separately, Asean manufacturing Purchasing Manager’s Index (PMI) fell by 0.4 points from its near four-year high of 51.4 in May to 51.0 in June. Despite this, the index remained above 50 for the sixth consecutive month. On a quarterly basis, the PMI surged to 51.1 in 2Q18, compared to 50.3 in 1Q18, its best quarterly expansion in four years indicating a healthy pace of growth going forward. The index in June was supported by buoyant PMIs of Vietnam (55.7), Singapore (53.6), Philippines (52.9), Indonesia (50.3), Thailand (50.2) and Myanmar (50.0) while Malaysia’s PMI remained below 50.

Source: Affin Hwang Research - 6 Jul 2018