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Economy

Indonesia and Philippines cut rates as recessions bite

Both Southeast Asian economies have been battered by the coronavirus

Both Bangko Sentral ng Pilipinas and Bank Indonesia cut rates on Thursday. (Source photos by Takaki Kashiwabara and Reuters) 

JAKARTA/MANILA -- The central banks of Indonesia and the Philippines -- two Southeast Asian countries that have been hammered by COVID-19 -- both cut benchmark interest rates on Thursday.

Indonesia, which is in recession for the first time in two decades, lowered its key rate for the fifth time this year. The Philippines, also mired in negative growth, defied market expectations with a surprise easing move.

Bank Indonesia's latest cut -- its first in four months -- on Thursday took the seven-day reverse repo rate to 3.75% from the previous 4%. That is the lowest since at least 2016, when the central bank began using the rate as its benchmark. BI has now lowered rates by a total of 125 basis points this year.

The move was forecast by eight of 22 economists polled by Reuters.

Indonesia continues to struggle to contain COVID-19, and the pandemic led to real gross domestic product falling 3.49% in the third quarter from a year earlier. The country recorded its first recession -- defined as two consecutive quarters of negative growth -- for the first time since the Asian financial crisis in the late 1990s.

Strong portfolio inflow into Indonesia as well as a high trade surplus for October has supported the Indonesian rupiah, and the currency is now more than 3% higher against the U.S. dollar compared to when Bank Indonesia last lowered rates in July. The relative stability of the rupiah, a mandate of the central bank, allowed the bank to make its most recent cut.

"This decision takes into account low inflation, maintained external stability, and further steps for national economic recovery. BI remains committed to providing liquidity," Gov. Perry Warjiyo told reporters. "Various indicators show that Indonesia's economic improvement continues... So we estimate that in Q4, GDP growth will start to be positive and then continue to increase in 2021."

The central bank is also continuing its purchase of government bonds -- so called quantitative easing -- to prop up the economy by helping government spending on its COVID-19 response.

While the Indonesia's economic output is forecast to contract this year, Finance Minister Sri Mulyani Indrawati said earlier this month that "the worst is over" for the country's economy and that it is now "in the recovery stage."

Indonesia has the highest number of COVID-19 cases in Southeast Asia. As of Wednesday, it had reported 478,720 infections and 15,503 deaths.

"The timing of further rate cuts will be determined by the performance of the rupiah," said Gareth Leather, senior Asia economist at Capital Economics. "Our forecast is that the rupiah will stabilize over the coming months, helped by a shrinking current account deficit, low inflation and an improvement in global risk appetite. If we are right about the rupiah then further rate cuts are likely."

Residents push baby strollers full of belongings they retrieved from their homes damaged by Typhoon Vamco in Rodriguez, Rizal province, Philippines on Tuesday.   © AP

The Philippine central bank cut its rate on Thursday by 25 basis points, in another surprise move to help revive a recession-hit economy.

The reduction brings the key rate to 2.0%, a record low. The central bank, Bangko Sentral ng Pilipinas, has cut rates by 200 basis points so far this year.

Thursday's decision comes after the country's economy contracted 11.5% in the third quarter, a weaker-than-expected recovery from the 16.9% decline in the second quarter, the peak of the pandemic-induced lockdowns.

Gov. Benjamin Diokno said "uncertainty remains elevated amid the resurgence of COVID-19 cases globally" even as "global economic prospects have moderated in recent weeks."

"Given these considerations, the Monetary Board assessed that there remains a critical need for continuing policy support measures to bolster economic activity and boost market confidence," Diokno said. "With a benign inflation environment and stable inflation expectations, the Monetary Board sees enough policy space for a reduction in the policy rate at this juncture to uplift market sentiment and nurture the country's economic recovery amid increased downside risks to growth."

The Southeast Asian economy has now shrunk 10% between January and September, and recent powerful typhoons that submerged parts of the capital and devastated farms are threatening the recovery in the fourth quarter.

The Asian Development Bank and the International Monetary Fund respectively expect the Philippine economy to contract by 7.3% and 8.3% for the entire year, worse than the 5.5% contraction projected by President Rodrigo Duterte's economic team in August.

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