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Four Asian central banks cut rates as virus rips markets

Indonesia, Australia, Philippines and Taiwan all move even as currencies slide

JAKARTA/MANILA -- Indonesia, Australia, the Philippines and Taiwan cut benchmark rates on Thursday, in moves aimed at stemming the economic hit from the new coronavirus pandemic that is battering global markets.

Bank Indonesia lowered its seven-day reverse repo rate by 25 basis points to 4.50% -- its second cut in as many months, and a step seen by 12 of 21 analysts surveyed by Reuters.

As expected, the Reserve Bank of Australia reduced its cash rate to an all-time low of 0.25% and launched a quantitative easing program for the first time, and Bangko Sentral ng Pilipinas slashed its key policy rate by 50 basis points to 3.25%.

Taiwan, meanwhile, cut its rate by 25 basis points to 1.125% after standing pat for 14 straight meetings.

The steps follow recent easing moves last week by the U.S. Federal Reserve, the Bank of Japan and the European Central Bank. Even so, the measures have done little to stop the market slide, with many analysts saying fiscal policy is more effective.

Indonesia's latest move follows a slew of fiscal measures announced by the government last week, including plans to waive corporate and personal income tax. But it was not an easy decision for the central bank -- the Indonesian rupiah has fallen more than 10% against the dollar this year. The currency touched its lowest level since the Asian financial crisis before the decision as investors shun riskier emerging market assets.

The central bank said it will keep its currency stabilization measures and continue to intervene in markets.

Indonesia's rate cut in February was a preemptive move, coming at a time when Indonesia still had no confirmed cases of COVID-19. A month on, the archipelago is very much caught in the global pandemic with 309 confirmed cases and 25 deaths, as of Thursday afternoon.

The tourism sector has been decimated by the outbreak, and while there are no citywide lockdowns, students and public servants have been told to study and work from home.

Meanwhile, Bank Indonesia lowered its domestic growth forecast for 2020 to 4.2%-4.6% from 5.0%-5.4%, though it expects a rebound of 5.2%-5.6% next year.

"A month ago, we did not know the that the spread of COVID-19 in developed countries could be very fast," said Gov. Perry Warjiyo. "Based on the information at that time, we saw the [recovery from] COVID-19 will be V-shaped, which was in line with various [other] parties.

"Looking again at the direct and indirect impacts... [disruption] could continue until April and May."

Gareth Leather, senior Asia economist at Capital Economics said further monetary easing by Bank Indonesia "is likely" as "growth is likely to slow sharply" this year.

Leather added, however, that the bank will need to weigh up any action against the performance of the rupiah, as further rate cuts may translate to an even weaker currency. "A high level of foreign currency debt makes the country vulnerable to sudden and sharp falls in the rupiah."

A man walks on an empty road in the central business district in Makati City, Metro Manila, as the Philippine government implements an "enhanced community quarantine" on the country’s main island of Luzon.   © Reuters

In the Philippines, the rate cut was the central bank's steepest since August and follows a 25 point reduction last month.

President Rodrigo Duterte has placed Luzon island under an effective lockdown for nearly a month. Luzon, where Manila is located, is home to 57 million people and makes up over half of the national economy. The Philippines has recorded 202 cases with 17 fatalities from the virus, as of Wednesday.

Central bank Gov. Benjamin Diokno said in a statement that the central bank noted that "while the enforcement of quarantine measures could help in slowing the spread of the virus, the resulting disruptions to industries and private spending are likely to reduce economic growth in the near term."

"The Monetary Board sees enough policy space for an assertive reduction in the policy rate at this juncture to cushion the country's growth momentum and uplift market confidence amid stronger headwinds," he added. "The BSP is prepared to use its full range of monetary instruments and to deploy regulatory relief measures as needed in fulfillment of its price and financial stability mandates."

Ahead of the announcement, the Philippine Stock Exchange index on Thursday fell by as much as 24%, before closing 13.3% lower at 4,632.42 points -- its lowest level in eight years. The stock market was closed on Tuesday and Wednesday due to the Luzon lockdown.

Nicholas Antonio Mapa, senior economist at ING Bank in Manila, said after the decision that the lower rates would do little to ignite loan demand "given that more than half of the workforce is holed up in their homes given strict curfews and restrictions for movement."

"We expect the BSP to roll out additional measures to ease liquidity conditions further such as the lowering of the term deposit facility volumes and or reductions to reserve requirements in the near term."

Two women walk next to the Reserve Bank of Australia headquarters in central Sydney, Australia.

In Australia, the central bank said after an emergency meeting on Thursday that it would not raise rates until it achieves full employment and inflation is sustainably within its 2%-3% target band.

The RBA set a yield target for three-year Australian government bonds of around 0.25%, which it plans to achieve through bond purchases in the secondary market. The bank also said it would provide a three-year funding facility to banks at a fixed rate of 0.25%.

"The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary and fiscal policy, play an important role in reducing the economic and financial disruption resulting from the virus," Gov. Philip Lowe said in a statement.

"At some point, the virus will be contained and the Australian economy will recover. In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly."

The coronavirus outbreak is threatening to end Australia's almost 30-year run without a recession, and the Australian dollar has weakened more than 20% against the greenback this year.

Credit ratings agency S&P said last week that Australia's economy will enter a recession by June, followed by a slow recovery with 1.2% growth for the year.

The government in Canberra said on March 12 that it would pump A$17.6 billion (about $10 billion) into the economy in a bid to prevent a recession.

In Taiwan, the central bank cut its gross domestic product forecast to 1.92% from 2.57%, saying it estimates the outbreak will last until June.

"Our goal is to keep enterprises operating. If they fail to have enough cash flow, liquidity, their capacity to repay debt will become a problem," Gov. Yang Chin-long told reporters in Taipei. "We lowered the interest rate this time not to stimulate economy, but to help enterprises' operations.

"We will adopt a looser monetary policy if necessary. We still have room to do so. However, we will not let the interest rate becomes negative or zero."

Additional reporting by Ismi Damayanti and Lauly Li

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