Expect More Aggressive Moves for Further Policy Easing by BI and BSP

Bank Indonesia (BI) lowered its policy rate for the second consecutive meeting by 25bps to 4.50% from 4.75% previously. Even though the policy rate is now at its lowest rate since April 2018, we believe BI will likely be cutting its policy rates more aggressively in the coming MPC meetings to counter the impact from Covid-19 on the domestic economy. On economic growth, BI lowered its 2020 GDP growth forecast for Indonesia to 4.2-4.6% from 5.0-5.4% previously (5% in 2019). However, we believe there are significant downside risks to the economy.

We believe BI still has some room to lower rates further especially following the recent 150bps emergency rate cuts by the US Fed, where there is a possibility of another rate 25bps cut next month, due to stable inflation and if economic growth slows further. Due to the recent plunge in global oil prices, headline inflation is anticipated to be steady following its increase to a sixmonth high of 3% in February from 2.7%. However, we believe the 25bps rate cut could add some depreciation pressure on the Rupiah which has already weakened by about 9.3% against the US Dollar since the start of the year. BI has intervened to stabilise the Rupiah through purchases of government debt papers. Apart from monetary policy measures to support the economy, the Indonesian government has implemented two fiscal stimulus packages worth 10.3 trn Rupiah and 22.9trn Rupiah, respectively.

Separately, Bangko Sentral ng Pilipinas (BSP) also cut its benchmark policy rate by 50bps to 3.25%, its second rate cut in a row, making this its lowest rate since May 2018. The cut was to address the negative spill overs associated with the ongoing outbreak. In February, BSP lowered its policy rate by 25bps to 3.75%. BSP noted that going forward it would consider “a range of other supplementary measures that may be required” to support growth over the medium term such as recalibrating the interest rate corridor settings and reducing the reserve requirement ratios.

BSP has room to conduct more monetary policy easing after it raised the policy rate by a total 175bps in 2018 in order to stem accelerating inflation. Recall that in 2019, the benchmark policy rate was lowered by a total of 75bps. Moreover, headline inflation is also stable after moderating to 2.6% in February from an eight-month high of 2.9% in January and is likely to ease further amid lower global oil prices. Moving ahead, we anticipate a sharp slowdown in economic activity for the Philippine economy amid the outbreak following the one-month lockdown from March 15 to April 14 but the slowdown may be offset by the PH27.1bn stimulus package recently announced by the government.

Source: Affin Hwang Research - 20 Mar 2020