JAKARTA/WELLINGTON: Bracing for more turmoil if the US Federal Reserve scales back its economic stimulus next week, Indonesia hiked interest rates to shore up its ailing currency, but elsewhere in Asia-Pacific policy makers less afraid of capital outflows held steady.
Bank Indonesia’s surprise increase in three key rates yesterday helped the rupiah bounce off a four-and-a-half year low, but it is still Asia’s worst performing currency so far this year, having lost around 15 percent 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 all left rates unchanged as expected, though they are at different stages of their economic cycles.
The Fed is widely expected to announce a reduction in its quantitative easing on September 18, to start bringing the curtain down on nearly five years of super-easy dollars. Investors have been expecting the move for months, so the impact 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 as economic recoveries in the US and Europe support exports from emerging economies. While emerging markets have taken a beating in the last few months, some have since steadied. But others like Indonesia and India, dependant on capital inflows to fund large current account deficits, remain vulnerable to further capital 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 Gareth Leather, economist at Capital Economics Asia.
The majority of economists polled by Reuters had expected BI to hold rates. In the event, it pushed up its benchmark rate by 25 basis points to 7.25 percent..
The central bank said the moves were designed to dampen inflation, bolster the currency and ensure its current account deficit was at a sustainable level.
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. BI also lowered its forecast for growth this and next year to 5.5-5.9 percent and 5.8-6.2 percent, respectively.
A current account deficit equivalent to 4.4 percent of gross domestic product, and inflation surging to almost 9 percent has 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.
“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,” Alan Oster, group chief economist at National Australia Bank in Melbourne.