With Fed on hold, Southeast Asia diverges on rate policy
With the US Federal Reserve holding off on raising interest rates, Southeast Asian central banks are tipped to take divergent approaches to monetary policy. While Bank Indonesia was set to cut its policy rate yesterday, according to most economists surveyed by Bloomberg, its Philippines counterpart is forecast to stand pat as it weighs possible future tightening to guard against price pressures from a rapidly growing economy. That’s against the backdrop of low US interest rates, which is bolstering investor appetite for higheryielding emerging-market assets.
“Other countries in the region like Indonesia would warrant more support from policymakers, whether be it in the form of monetary or fiscal support,” said Eugenia Victorino, an economist at Australia & New Zealand Banking Group Ltd in Singapore. “That’s not the case for the Philippines.”
The two countries face different growth risks: Bank Indonesia has been in easing mode since the beginning of the year, cutting rates four times to help counter sliding commodity prices; the Philippines is among the fastest-expanding economies in Asia, with gross domestic product climbing 7 per cent in the second quarter from a year earlier.
Bank Indonesia last month kept its benchmark rate unchanged at 5.25 per cent, but lowered the lending facility rate — the level at which commercial lenders can borrow from the central bank — by 100 basis points to 6 per cent.
With inflation undershooting the 3 per cent to 5 per cent target in August — coming in at 2.8 per cent — policymakers in Southeast Asia’s biggest economy have ample room to continue easing. 4.9 per cent — at or very close to most estimates of its lowest sustainable level — he has swung decisively in favour of hiking to prevent an overshoot in unemployment from triggering much higher inflation.
Rosengren, 59, played a key role during the 2008 financial crisis leading the Fed’s efforts to prevent a collapse in money market mutual funds. He has also frequently cited the number of cranes he sees while heading to and from work in downtown Boston as he warns about a potential bubble in commercial real-estate valuations.
“A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery,” Rosengren said September 9, in Quincy, Massachusetts.
The disagreement shows the mood on the FOMC is shifting, said Roberto Perli, a partner at Cornerstone Macro LLC in Washington and former Fed economist.
“The chair is not an emperor,” he said.” I don’t think she can, even if she wanted to, hold these guys back.”
Running room
At her press conference Yellen said she, too, didn’t want the economy to overheat, but still saw an opportunity to bring more Americans back to work as the labour market tightened.
“The economy still has a little more room to run,” she said.
Yellen characterised the committee’s disagreements as limited to the question of timing, saying most of the group agreed they must eventually get back to gradually tightening policy.
“There’s general agreement among participants on that, but the precise timing for removing that accommodation is something on which we had active discussions, and there are a range of opinions,” she said. “The dissents represent a judgement on the part of some of my colleagues that it’s important to begin that process now.”
The FOMC currently has 10 voting members. The five Washington-based Fed Board governors and New York Fed President William Dudley hold permanent votes. Four additional votes rotate annually among the remaining 11 regional Fed bank presidents.