Bank Indonesia likely to maintain its policy rate at 6% throughout 2019

Bank Indonesia (BI) decided to keep its policy rate at 6% in its monetary policy meeting (MPC) this week, in line with its efforts to strengthen external stability and narrow the current account deficit. This was its fourth consecutive meeting, where interest rates were unchanged. In 4Q18, the current account deficit widened to US$9.1bn (3.6% of GDP) from US$8.6bn (3.3% of GDP) in 3Q18, making this its largest deficit since 2Q14. We believe the BI’s decision to hold its rate was partly due to the country’s current account deficit, which will possibly refrain BI from making any changes to its policy rate (especially on the decision of rate cuts) in the coming months, even if inflation remains manageable. Some pressure on the current account deficit may persist from soft trade data. In February, exports sustained a decline for the fourth straight month by 11.4% yoy (-4.3% in Jan), its sharpest drop since June 2017. Despite this, the trade balance managed to register a surplus for the first time since September 2018 of US$0.33bn. Although we expect the trade balance to be supported by the government’s recent measure (such as raising import taxes on more than 1,000 goods), we remain cautious over the country’s large trade exposure to both China and US, which may continue to hinder export performance. Going forward, we expect BI to maintain its policy rate at 6% throughout 2019, partly to support the Rupiah as well as maintaining the attractiveness of the domestic financial assets.

Similarly, the Bank of Thailand (BOT) left its benchmark policy rate steady at 1.75% at its March monetary policy committee meeting, where it has remained unchanged since its last 25bps rate hike in December 2018. In its statement, BOT maintained a cautious tone regarding slower external demand stemming from trade protectionist measures between US and China, slower economic growth expected in China and in the advanced economies. BOT revised its country’s 2019 GDP growth forecast downwards to 3.8% yoy from 4% previously, while core-inflation forecast was lowered to 0.8% yoy from 0.9% previously. We are not expecting any changes to BOT’s monetary policy in the near term due to the possibility of slower economic growth in Thailand, while inflation remains tepid. Although inflation rate rose to reach its fastest rate since November 2018 of 0.7% yoy (0.3% in January), it still remains below BOT’s inflation target range of 1-4%. We believe uncertainties surrounding the general election may also impact the country’s GDP growth.

In the Philippines, Bangko Sentral ng Pilipinas (BSP) kept its overnight reverse repurchase policy steady at 4.75% in its latest monetary policy meeting in March. BSP’s effort to reign in inflation last year through raising interest rates five times in 2018 has managed to contain inflationary pressure recently. BSP guided that risks to the inflation outlook is broadly balanced but will continue to monitor developments affecting its outlook.

Source: Affin Hwang Research - 22 Mar 2019