18 January 2018
Indonesia: BI is likely to keep policy rates steady

Bank Indonesia (BI), Indonesia's central bank, is likely to keep monetary policy settings steady at tomorrow's meeting

There are no compelling reasons to tweak policy settings

Recent factors that BI considers in deciding on monetary policy settings are quite favorable. Inflation is expected to remain within the 2018 target range of 2.5% to 4.5%%. Growth is expected to moderately accelerate. The IDR has recently appreciated and is likely to achieve the target rate of Indonesia's fiscal program. 

Philippines: BSP tightening could be sooner

The Governor of the Philippine central bank (BSP) seems to have turned cautious over second-round effects of tax reform on inflation

Possible second-round effects of tax-reform related price increases raise caution

BSP Governor Espenilla has turned more cautious recently in terms of monetary policy due to possible second round effects from higher excise taxes on oil products and sweetened beverages. These taxes form part of the tax reform package that was recently signed into law last month. The tax reform cuts individual income tax rates but also raises excise taxes to not only cover government's losses from the income tax cut but also raise additional revenues for government's infrastructure and social service spending programs. The incremental government revenues of P90bn come from the excise tax component of the package. BSP, government and economists believe that the direct impact of the excise taxes would be between 0.4ppt to 1ppt increase on inflation. BSP in the past view the inflaiton impact as transitory which would not require a monetary policy response. But second-round effects are looming and could threaten the inflation target range of 2% to 4%. Second-round effects are possible increases in minimum fares for public transport and a possible domino effect on wages. We estimate that a 25% increase in minimum transport fares could raise inflation by as much as 1ppt on CPI. There are already petition to the regulatory agency for a 25% to a 50% hike in minimum fares. Labor unions are preparing to also seek an increase in minimum daily wages. The likely wage petition seeks to raise wages especially for minimum wage earners who do not benefit form the reform's income tax cuts.

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Good MornING Asia - 18 January 2018

Global sentiment has been bouyed by optimism that a US government shutdown can be avoided - but we see this as a temporary lull in the fortunes of the USD. Otherwise, a day of inaction beckons from Asian central Banks

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