Public holidays will keep the Asian calendar relatively quiet for the week ahead, with markets closed in India, Indonesia, Japan and Malaysia. There are no central bank meetings but we're watching specific data to see how it could influence policy decisions in the region
Japan will likely report a trade deficit next week but we don't think this will have any strong implications for the currency. The country essentially operates a balance on trade these days and drifts in and out of deficit with little impact on the yen.
Japanese CPI will rise a little further – in line with the earlier Tokyo release, but core inflation will remain anchored a little above zero. Nothing to excite the Bank of Japan here.
Despite slowing inflation, the central bank bought some insurance with a 25 basis point rate hike
Despite clear signs of slowing inflation with non-monetary policy measures finally taking hold, Bangko Sentral ng Pilipinas (BPS) opted to hike the policy rate for a fifth straight time to anchor inflation expectations and stave off any potential second-round effects. Inflation remains elevated at 6.7% and with wage adjustments and transport fares kicking in over the course of November, BSP opted to buy some insurance so that inflation expectations would remain anchored.
The BSP hiked rates despite the government rolling out two key and substantial non-monetary measures overnight with excise taxes on fuel suspended in 2019 and the key rice tarrification bill approved by the Senate. These two measures were likely factored into the BSP’s inflation forecasts with inflation seen at 3.5% in 2019 (from 4.3%) as BSP estimates the rice tarrification bill to shave 0.73 percentage points from inflation.
The BSP’s 25 basis point rate hike looks to ensure inflation expectations remain well-anchored, yet remaining aware of tighter global financial conditions and uncertainty emanating from possible geopolitical risks. As such, the central bank moved “proactively”, with yet another round of rate hikes despite its much lower inflation forecast for 2019. BSP’s primary mandate is price stability to provide an environment conducive for economic growth. With inflation seen to slide back within the target in 2019, the central bank believes that the economy remains resilient enough to ride out the 175 basis point rate hike year to date. But with higher rates already showing signs of sapping economic growth momentum, the Philippines will need to continue to rely heavily on government spending to shore up slowing consumption and investment.
The BSP closed its statement reaffirming its readiness to take appropriate actions to safeguard its price and financial stability objectives. In the near term, the peso will benefit from the recent action while structural flows ahead of the holiday period may also provide an added boost. Over the medium-term, however, projected current account deficits will likely exert a mild depreciation pressure until a clear reversal is seen on the external front.
Bank Indonesia (BI) continues to try tame factors that weaken the rupiah (IDR). The surprise 25bps policy rate hike and a higher bank reserve requirement follow a worse than expected trade gap in October
Bank Indonesia’s (BI’s) surprise two-pronged tightening addresses a key factor of IDR’s weakness this year, the current account deficit. BI surprised the market with not only a 25bps policy rate hike but also tightened liquidity by raising banks’ reserve requirements. The rate hike brings the total increase to 175bps this year. The tightening should eventually work through a slowing economy and moderation of domestic demand that has been powering imports and worsened not only the trade balance but also the current account.
Indonesia reported earlier today a trade deficit in October that is the second worse since April 2014. We fear that the worse than expected trade deficit of $1.8bn would result in a current account deficit of around -3% of GDP for 2018. The monetary tightening would likely moderate the deterioration of the external balances. Meanwhile, IDR is benefiting from the BI’s tightening. We expect that BI’s support for IDR will continue while offsetting the negative impact of the current account deficit on the currency. We expect BI to hike policy rates by at least another 50bps over the policy horizon.
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