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Economy

Looming US rate hike spurs Asian central banks to act pre-emptively

Indonesia and Philippines raise rates to stimulate economies

The Philippine central bank says its monetary tightening is justified in light of rising consumer prices.   © Reuters

MANILA/JAKARTA -- Southeast Asia's central banks raised interest rates on Thursday in pre-emptive moves ahead of an expected tightening by the U.S. Federal Reserve next month.

Bank Indonesia and the Philippines' Bangko Sentral ng Pilipinas both hiked interest rates by 25 basis points each. The Indonesian central bank's seven-day reverse repo rate now stands at 6% while the BSP's benchmark policy rate went up to 4.75%, the highest since January 2009.

In raising interest rates, Bank Indonesia said the move was "intended to strengthen the attractiveness of domestic assets in anticipation of global rate hikes over the next several months."

The BSP, for its part, said the monetary board has also considered the impact of the expected hike by the Fed on top of its primary goal of keeping inflation within target.

"The Fed's policy actions also tell on domestic policy actions, particularly because interest rates are an important factor behind capital flow movements," BSP Deputy Governor Cyd Tuano-Amador said on Thursday.

The Federal Reserve this month kept its Federal Funds rates unchanged at 2% to 2.25%, but has signaled a quarter percentage point increase next month.

Philippines said it expected inflation to settle within its target by next year as price mitigating measures such as liberalizing rice imports and a suspension in oil tax hikes ease upward pressure on consumer prices. However, elevated inflation expectations and wage hike pressures warranted another round of tightening.

"The monetary board deemed it necessary to respond with proactive policy action to help temper the risks to the inflation outlook," Tuano-Amador said.

Rising consumer prices brought household spending growth to a four-year low and was partly blamed for the economy growing at its slowest pace since 2015.

For Indonesia, the central bank also said the rate hike was needed to stem a widening current-account deficit.

"The decision is a follow-up measure by Bank Indonesia to strengthen efforts to reduce the current-account deficit to a safe limit," Bank Indonesia Governor Perry Warjiyo told reporters on Thursday.

Indonesia's current-account deficit reached 2.86% of gross domestic product in the first nine months, inching closer to the bank's "safe limit of 3%."

"The widening current-account deficit has been affected, by, among others, increasing imports, mainly driven by some infrastructure projects that are believed to improve the economic productivity in the future," Warjiyo said.

The country's trade deficit, on the other hand, reached $1.82 billion in October, wider than market expectations.

Warjiyo said the bank has also revised its projection for economic growth this year to 5.1%. The bank last month said the growth was projected to be on the lower end of its range estimate of 5% to 5.4%. The official government growth target for this year is 5.4%.

The revised projection came after Indonesia's central statistics agency announced slower GDP growth in the third quarter of the year to 5.17%, down from 5.27% in the second quarter.

Alex Holmes, Asia economist for Capital Economics, said Indonesia's policy decisions would hinge on the rupiah's performance against the U.S. dollar.

"If the rupiah's slide against the U.S. dollar resumes, then we doubt today's hike will be the last in the current cycle," Holmes said.

The rupiah had gained strength against the greenback at the end of October, reaching 14461 against the dollar last week, its strongest against the dollar since August. However, it resumed its fall after Bank Indonesia announced the widening current-account deficit for in the third quarter.

Nikkei staff writer Shotaro Tani contributed to this story.

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