Indonesia hikes rates on US stimulus fears
BRACING for more turmoil if the US Federal Reserve (Fed) scales back its economic stimulus next week, Indonesia yesterday hiked interest rates to shore up its ailing currency, but elsewhere in the Asia-Pacific region policy makers less concerned by capital outflows held steady.
Bank Indonesia’s surprise increase in three key rates helped the rupiah bounce off a four-and-a-halfyear low, but it is still Asia’s worstperforming currency so far this year, having lost about 15% of its value against the dollar.
Having come through the past few months of a fierce emerging markets sell-off largely unscathed, New Zealand, South Korea and the Philippines left rates unchanged as expected, though they are at different stages of their economic cycles.
The Fed is widely expected to announce a cut in its quantitative easing on Wednesday, to start bringing the curtain down on nearly five years of super-easy dollars. Investors have been expecting the move for months, so the effect on markets should be less when it happens.
“Is the emerging market sell-off over? Likely not,” said a recent research note by Credit Agricole, though it added that the pressure may moderate as US bond yields rise at a slower pace and economic recoveries in the US and Europe support exports from emerging economies.
While emerging markets have taken a beating in the past few months, some have since steadied. But others like Indonesia and India, dependent on capital inflows to fund large current account deficits, are vulnerable to further outflows.
“We believe that the current bout of currency volatility is nearing an end and that a prolonged reversal of capital flows is unlikely. As such, we think further aggressive rate hikes in Indonesia will be unnecessary,” said Capital Economics Asia economist Gareth Leather.
“Nevertheless, uncertainty about the timing of eventual policy tightening by the Fed could trigger further bouts of volatility, prompting further rate hikes in Indonesia.”
The majority of economists polled by Reuters had expected Bank Indonesia to hold rates steady. It pushed up its benchmark rate by 25 basis points to 7.25%.. The central bank said this was to dampen inflation, bolster the currency and ensure the country’s current account deficit was sustainable.
Bank Indonesia has now hiked its benchmark rate by a total of 150 basis points in a series of increases since June, when the exodus from emerging markets gathered critical mass. It also lowered its forecast for growth this and next year to 5.5%5.9% and 5.8%-6.2%. A current account deficit equivalent to 4.4% of gross domestic product, and inflation surging to almost 9% have drained investors’ confidence in Southeast Asia’s biggest economy.
India is in a similar fix, only with weaker economic growth. Reluctant to raise interest rates that could exacerbate the economic slowdown and drive up the cost of government borrowing, the Reserve Bank of India has delayed its policy meeting until two days after the Fed meets.
How the Fed sequences the winding down of its quantitative easing programme will set the rhythm for other global central banks as they juggle the objectives of supporting growth, controlling inflation and maintaining financial stability.
“Growth expectations have been revised down for India, emerging Asia and Brazil as their monetary policy will have to be tighter than would have been the case if there had been a more gradual market adjustment to the Fed’s planned moves,” said National Australia Bank group chief economist Alan Oster.
“Fortunately, Chinese growth has held up and its economy is one-anda-half times the size of India, Brazil and Indonesia combined.”
Worries over whether the conflict in Syria will spread, lighting a fire under oil prices, are also out there.
“How events unfold over the coming weeks could significantly change the global environment,” the Reserve Bank of New Zealand warned in its monetary policy statement. The central bank sounded a hawkish note on its outlook for rates, signalling that they would start to rise by the middle of next year.
Announcing that it was keeping its official cash rate at a record-low 2.5%, the reserve bank also raised its outlook for 90-day bank bill rates to 3% in the June 2014 quarter, indicating that rates may rise by 25 basis points by then — sooner that it suggested in its previous statement.
“(Official cash rate) increases will likely be required next year,” said governor Graeme Wheeler, repeating his pledge to keep rates unchanged this year. He said Fed tapering could ease some upward pressure in the New Zealand dollar, which hit a post-float high against a currency basket this year.