(Bloomberg) — Central banks in Indonesia and Malaysia will likely deliver another modest interest rate increase each as they look to wind down their monetary tightening and turn their attention to economic growth.
(Bloomberg) — Central banks in Indonesia and Malaysia will likely deliver another modest interest rate increase each as they look to wind down their monetary tightening and turn their attention to economic growth.
Bank Indonesia and Bank Negara Malaysia are expected to raise their benchmark rates by 25 basis points at their respective meetings Thursday, according to Bloomberg surveys. A separate poll showed that most analysts expect this to be Malaysia’s final hike and the penultimate move for Indonesia.
The two countries face similar circumstances with headline inflation off their peaks while the core gauges were still running hot. A modest hike could ward off any lingering price pressures, especially ahead of festivities around Ramadan observed from March.
Easing US inflation and a downshift in the Federal Reserve’s tightening are propping up regional currencies including Indonesia’s rupiah and Malaysia’s ringgit, which have gained 3.2% and 2% year-to-date.
Appreciating currencies help ward off imported inflation but they’re bad news to exporters especially during times of weaker global demand. Given the headwinds, policymakers in both nations will likely hold back from further aggressive tightening.
Indonesia
Bank Indonesia will likely increase its seven-day reverse repurchase rate to 5.75%, its highest level in more than three years, according to 23 of 28 analysts polled. Five expect the central bank to hold for the first time since July.
While full-year inflation in 2022 came in below the central bank’s expectations, it may be too early for Governor Perry Warjiyo to let his guard down, with the December print surprising on the upside. President Joko Widodo also called attention to rising costs of food staples.
That could derail Bank Indonesia’s pledge to bring headline inflation back within the 2%-4% goal in the second half of this year and keep the core gauge within the target band throughout.
While the rupiah is among the region’s top gainers this year as foreign funds returned, it may miss the commodity boom that brought in dollars in 2022. Latest exports data disappointed, and the trade balance is seen to flip to a deficit this year.
“A rate hike will also help lighten the load from the decreasing trade balance and maintain a positive trend on FX reserves,” said PT BRI Danareksa Sekuritas Chief Economist Telisa Falianty.
If pressure on the currency dissipates further, Bank Indonesia may be able to end its tightening cycle earlier than expected and support economic growth that’s predicted to slow this year.
“A sustained rebound in the rupiah would raise the odds of an earlier stop at 5.75%,” said Krystal Tan, an economist at Australia & New Zealand Banking Group, whose institution forecasts BI’s terminal rate at 6%.
Malaysia
Bank Negara Malaysia is expected to increase the overnight policy rate to 3%, according to 17 of 18 economists surveyed. One predicts the central bank will decide to hold.
Another rate hike will help curb record core inflation, while further realigning Malaysia with global monetary policy normalization, according to Afiq Asyraf Syazwan, an analyst at Kenanga Investment Bank Bhd.
“In March, we are only assigning a 50% probability of another similar sized rate hike due to the expectation of a global economic slowdown and increasing uncertainties, especially on the geopolitical front,” said Asyraf.
Malaysia was the first to raise its benchmark rate in Southeast Asia’s tightening cycle starting May 2022, although the Philippines emerged as one of the most aggressive. Another hike on Thursday would bring borrowing costs back to levels just before the pandemic.
“We think declining inflation and a sharp slowdown in economic growth will prompt the central bank to conclude its tightening cycle as it then shifts focus from containing inflation towards supporting demand,” said Shivaan Tandon of Capital Economics.
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