• Bangko Sentral ng Pilipinas (BSP) left its policy rate at a record low of 2.25% for the second consecutive meeting in its October monetary policy meeting
• Indonesia’s headline inflation rose slightly to 1.4% yoy in September from 1.3% yoy in August, below Bank’s Indonesia’s inflation target of 2-4%
• Asean Manufacturing Purchasing Manufacturing Index (PMI) in September fell to 48.3 from 49.0 in August after increasing for four consecutive months due to the decline in output amid a decrease in new orders

BSP Likely to Leave Rates Unchanged Unless Growth Slows Significantly

Bangko Sentral ng Pilipinas (BSP) left its policy rate at a record low of 2.25% for the second consecutive meeting in its October monetary policy meeting. So far in 2020, BSP has lowered its policy rate by a total of 175bps. We anticipate BSP to leave its policy rate unchanged for the time being as fiscal stimulus measures are anticipated to support economic growth in the coming quarters. Recently, a stimulus package worth 165.5bn pesos was signed into law to further support the economy. Furthermore, growth is also anticipated to be underpinned by the pickup in economic activity following initial containment measures. However, the possibility of a further spread in Covid-19 will continue to be a downside risk for the domestic economy. Currently, one southern Philippine province has been placed under a mild lockdown from 1 October. If number of cases rise in other parts of the country, this could lead to stricter lockdowns. Therefore, unless recovery in growth is dampened significantly, we anticipate BSP to leave the policy rate unchanged at 2.25% throughout 2020.

In Indonesia, headline inflation rose slightly to 1.4% yoy in September from 1.3% yoy in August, below Bank’s Indonesia’s inflation target of 2-4%. Headline inflation was lifted mainly by higher cost of food, beverage and tobacco. However, cost of transport and information, communication and financial service continued to decline in September. We believe Indonesia’s inflation to remain low in the near term due to slower domestic demand, likely to be hampered by the ongoing lockdown in Jakarta, which began since 14 September 2020. As the headline inflation may stay below BI’s target inflation range in the near term alongside the weakness of the Rupiah against the US Dollar which has depreciated by 6.8% in the first 9 months of 2020, we believe that BI will likely leave its policy rate unchanged at 4%.

Separately, Asean Manufacturing Purchasing Manufacturing Index (PMI) in September fell to 48.3 from 49.0 in August after increasing for four consecutive months due to the decline in output amid a decrease in new orders. The region’s PMI has remained below the expansionary level of 50 since March 2020. Among the Asean countries, only Vietnam and Philippines registered a reading above 50 during September at 52.2 and 50.1, respectively. Meanwhile, Thailand (49.9), Malaysia (49.0), Singapore (48.0) Indonesia (47.2) and Myanmar (35.9) were below the 50 level mark. Overall, we believe that the lower readings show some concerns of a second wave of infections and lockdown measures emerging. As a result, this may further weigh on the pace of recovery in the region’s economic growth. As countries like Myanmar and Indonesia have re-imposed lockdowns, we believe that the region’s manufacturing sector may continue to trend slightly lower going forward.

Source: Affin Hwang Research - 2 Oct 2020