Indonesia, Philippines set to hike rates further to quell inflation

TWO South-east Asian central banks will likely add to the flurry of global tightening on Thursday (Sep 22), as policymakers in Indonesia and the Philippines seek to ease price and currency pressures.

The majority of economists in a Bloomberg survey expect Bank Indonesia to raise its benchmark interest rate by 25 basis points to a 2-year high of 4 per cent. Bangko Sentral ng Pilipinas (BSP) is seen to deliver a half-point hike to take its policy rate to 4.25 per cent, its highest since August 2019.

Central bankers in the 2 nations have signalled a readiness to act to quell inflation, which eased slightly in August but remains well above their 2-4 per cent target bands. Both expect inflation to accelerate further in the coming months amid food shortages in the Philippines and higher fuel prices in Indonesia.

Their currencies have also been hit by the emerging-market sell-off, with the Philippine peso at a record low and the Indonesian rupiah falling past the psychological level of 15,000 a dollar.

Here’s what to watch out for in Thursday’s decisions:


Investors will look for forward guidance from Indonesia on how it will chart the pace and scope of its monetary normalisation without derailing economic recovery.

South-east Asia’s largest economy is contending with the ripple effects of a 30 per cent price increase in its most widely-used fuels that threatens to send inflation near 7 per cent. Governor Perry Warjiyo had said inflation is not expected to return within the 2-4 per cent goal until the second half of 2023, as they monitor its potential impact to households and businesses.

“Bank Indonesia will be keen to tame inflationary expectations in light of the recent increase in subsidised fuel prices,” said Radhika Rao, an economist with DBS Bank. “While the risk of a front-loaded and large rate hike cannot be discounted, incremental moves will help tighten financial conditions at a gradual pace so not to stymie a pick-up in credit activity.”

At the same time, Indonesia will be weighing the risks to its currency outlook amid more aggressive tightening from the Federal Reserve and other major central banks. It launched its own version of Operation Twist in August that involves selling short-term bonds to boost yields, with the hope of luring foreign inflows to underpin the rupiah and tame imported inflation.

Record-high export earnings and a widening trade surplus – thanks to its coal, nickel and palm oil shipments – help provide support for Indonesia’s currency. The rupiah has weakened 0.7 per cent so far this second half of the year, among the smallest declines in Asia.


With the Philippines widely expected to lift its benchmark rate anew, focus will be on whether they will continue tightening monetary policy through the year.

BSP governor Felipe Medalla earlier this month signalled readiness for as many as 3 more quarter-point rate hikes, depending on the Fed’s actions. BSP has so far this year raised the key rate by 175 basis points in 4 moves.

Still, rising import costs are aggravated by the peso’s fall to record lows this month amid expectations of aggressive Fed rate hikes. While headline inflation dipped last month, it remained well above BSP’s 2-4 per cent target. Core inflation – which strips out volatile food and energy costs – also quickened, suggesting broadening price pressures.

“These factors all point to a high possibility of another outsized rate hike,” said Sophia Ng, a currency analyst at MUFG Bank, who forecast a half-point increase Thursday.

Policymakers are expected to release updated price growth forecasts Thursday. Analysts are on the lookout for comments on when inflation will peak as well as on the bank’s foreign-exchange intervention.

“Drivers of monetary policy going forward will continue to be dependant on inflation and the inflation outlook, on top of prospects of further rate hikes by the Fed,” said Ng, adding that there’s scope for the BSP to raise rates further this year. BLOOMBERG