Two Southeast Asian central banks diverged in their policy settings Thursday, with Malaysia unexpectedly standing pat and Indonesia delivering a widely expected interest-rate increase that brings it closer to the end of its tightening cycle.
(Bloomberg) — Two Southeast Asian central banks diverged in their policy settings Thursday, with Malaysia unexpectedly standing pat and Indonesia delivering a widely expected interest-rate increase that brings it closer to the end of its tightening cycle.
Bank Indonesia raised its benchmark rate by 25 basis points to 5.75%, while Bank Negara Malaysia stood pat as predicted by Euben Paracuelles of Nomura Holdings Inc., making him the lone analyst to correctly forecast the decision among 18 economists surveyed by Bloomberg.
Malaysia was the first in Southeast Asia to raise borrowing costs in May 2022 to fight price pressures, while Indonesia was among the last to jump on the tightening bandwagon. Cooling inflation in the US and dimming chances of more aggressive action by the Federal Reserve has taken the pressure off regional currencies, helping policymakers rein in prices and turn their focus on supporting their economies.
Central bankers in both nations signaled their growth priorities and expectations of moderating inflation, amid fears of a recession in some advanced economies.
“Global economic growth this year will be slower than expected, due to the recession risk in the US and Europe, and China’s challenging exit from Covid Zero,” Bank Indonesia Governor Perry Warjiyo said in a briefing, adding that hikes so far are adequate to rein in inflation.
Central Bank Rates Seen Peaking Soon in Southeast Asia (1)
Continued policy tightening by central banks will pose headwinds to the global growth outlook, Malaysia’s central bank said in a statement, adding that pausing now would allow it to assess the impact of its previous rate increases.
“Looks like BNM is more focused on the downside growth risks rather than the upside inflation risks,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. “They want time to assess the lagged effects of last year’s policy tightening.”
Malaysia sees price gains slowing while staying elevated, and growth moderating this year after a better-than-expected showing in 2022. Indonesia forecasts headline inflation to return within its 2%-4% target after September, as it reiterated its view for economic expansion to be at the midpoint of its 4.5%-5.3% range this year.
“The tone from BI suggests they may be close to peak with attention shifting to growth,” ING Groep NV Senior Economist Nicholas Mapa said. “BI will be taking their cue from the global and domestic growth outlook and we’ll be monitoring the potential impact of softer exports in the coming months.”
Warjiyo said Bank Indonesia expects the current account — the broadest measure of trade in goods and services — to be anywhere between a surplus and deficit equivalent to 0.4% of GDP.
Indonesia’s benchmark stock index gained 0.8% on Thursday, while the rupiah pared an earlier decline to trade 0.1% weaker at 15,104 per dollar. The Malaysian ringgit weakened 0.2% after the decision, while stocks were little changed.
The currencies have gained this year, with the rupiah emerging as Asia’s second-best performer and the ringgit appreciating almost 2%. That’s thanks to foreign investors returning to emerging markets amid signs of waning US inflation and a downshift in the Fed’s tightening.
“Growth concerns will start to dominate more and more going forward. Indeed, in the case of the more export-oriented Malaysia, growth worries have already tellingly superseded those on inflation,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore.
“If you are looking for central banks that are still hiking, look elsewhere. These two are very much ready to say bye-bye to the uptick cycle.”
–With assistance from Norman Harsono, Eko Listiyorini, Soraya Permatasari, Yudith Ho, Tomoko Sato, Matthew Burgess, Chester Yung, Ditas Lopez and Liau Y-Sing.
(Wraps rate decisions by Malaysia and Indonesia)
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