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 policymakers 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 US 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 Wednesday, to start bringing the curtain down on nearly five years of super-easy dollars.
While emerging markets have taken a beating in the last few months, some have since steadied. However, others like Indonesia and India, dependant on capital inflows to fund large current account deficits, remain vulnerable to further capital outflows.
The majority of economists polled by Reuters had expected Bank Indonesia 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.
The bank also lowered its forecast for growth this and next year to between 5.5 and 5.9 percent and 5.8 and 6.2 percent, respectively.
A current account deficit equivalent to 4.4 percent of GDP, 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.
How the Fed sequences the winding down of its quantitative easing program will set the rhythm for other global central banks as they juggle the objectives of supporting growth, controlling inflation and maintaining financial stability.
“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,” said Alan Oster, group chief economist at National Australia Bank in Melbourne.
“Fortunately, Chinese growth has held up and its economy is one-and-a-half times the size of India, Brazil and Indonesia combined,” he said.
The Reserve Bank of New Zealand (RBNZ) sounded a surprisingly hawkish note on its outlook for rates, signalling they would start to rise by the middle of next year and sending the domestic currency to a four-week high.
Announcing it was keeping its official cash rate at a record-low 2.5 percent, RBNZ also raised its outlook for 90-day bank bill rates to 3 percent in the June 2014 quarter, indicating that rates may rise by 25 basis points by that time. That is sooner that it suggested in its previous statement.