Costlier Rice Unlikely to Spur Indonesia, Philippine Rate Action

Central banks in Indonesia and the Philippines will likely leave borrowing costs unchanged as they weigh inflationary pressures including surging rice prices against risks to economic growth and their currencies.

(Bloomberg) — Central banks in Indonesia and the Philippines will likely leave borrowing costs unchanged as they weigh inflationary pressures including surging rice prices against risks to economic growth and their currencies.

Twenty of 22 economists polled by Bloomberg expect the Bangko Sentral ng Pilipinas to keep its target rate 6.25% Thursday, while two penciled in a quarter-point hike. Meanwhile, Bank Indonesia will probably hold its seven-day reverse repurchase rate at 5.75%, according to all 27 analysts surveyed.

Both Southeast Asian nations saw inflation quicken last month as rice prices shot up to multi-year highs. Dry weather induced by El Nino hit production of the staple grain, prompting export restrictions in the world’s top shipper India. Reports of hoarding among local distributors boosted costs even further.

Policymakers will also be wary of currency weakness that could worsen imported inflation, especially as global oil prices also rally. The Philippine peso and Indonesian rupiah are among Asia’s worst performers this quarter as investors shun risky assets and bet on rates to remain higher-for-longer in the US.

“I would expect a ‘hawkish hold’ from both central banks but likely to varying degree,” said Euben Paracuelles of Nomura Holdings Inc.

With Philippine inflation still well above the 2%-4% goal, the BSP will “maintain a relatively forceful language” that it’s ready to resume rate hikes if needed, Paracuelles said. In Indonesia, where price gains have returned to target, BI may emphasize the use of other policy levers to stabilize the currency.

Here’s what to watch for in Thursday’s decisions:

The Philippines

The BSP is widely tipped to maintain its policy rate for the fourth straight meeting, as it balances inflation risks with slowing economic growth and a weaker peso. The currency is the region’s worst performer this quarter, depreciating 2.8% against the dollar.

Price gains quickened anew last month to 5.3%, fanned by rice gaining at their fastest pace in nearly five years. The staple grain’s soaring costs have prompted President Ferdinand Marcos Jr. to cap prices in the Southeast Asian nation, the world’s top rice importer.

Despite the uptick, BSP Governor Eli Remolona last week signaled a continued pause on monetary policy, as he expects inflation to be back within the central bank’s goal next month, and food supply shocks to dissipate “very quickly.”

“The higher inflation was driven by food and oil mostly, so monetary policy tightening cannot impact this increase in inflation,” said Shreya Sodhani, regional economist at Barclays Bank Plc.

The BSP would likely steer clear from changing the key rate as it continues to assess how previous monetary tightening is affecting the economy, which grew slower-than-expected last quarter. “Any additional rate hike will put a lid on private consumption growth for longer, which is a path the BSP will try to avoid,” said Sarah Tan, an economist at Moody’s Analytics.


Monetary policy has also been a delicate balancing act for Bank Indonesia, as it looks to support the rupiah without having to raise borrowing costs. Economic growth, while still at the 5% levels, is at risk of slowing due to softer bank lending, consumption and exports.

Its new tools are showing promise. The bank got 24.5 trillion rupiah ($1.59 billion) in last week’s maiden auction of its new rupiah securities, called SRBI, which is aimed at attracting fund flows. A term deposit facility for exporters’ dollar earnings are seeing higher take-up.

“The rupiah has been under pressure but has not strayed from the regional pack, so Bank Indonesia’s strategy has been fairly effective so far,” ING Groep NV economist Nicholas Mapa said. The currency is down more than 2.6% quarter-to-date against the dollar, tracking losses across the rest of the region.

Higher-for-longer rates and the threat of a government shutdown in the US could trigger further selloff in emerging markets. At the same time, Indonesian lawmakers have urged the BI to be “bold” in easing borrowing costs to spur investment ahead of the 2024 presidential polls.

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