Asia-Pacific: Financial stability concerns reflected in rate decisions and forex intervention

Indonesia: The board of governors of Bank Indonesia today voted to raise interest rates by 25 basis points to 6%, aiming to act pre-emptively to resist rising inflation expectations.

Bank Indonesia attributed the rise in inflation expectations to forthcoming government fuel subsidies. The effect is not yet showing up in the inflation figures, as the CPI registered slight deflation at -0.03% month-on-month in May, while year-on-year inflation was 5.5%, a level the central bank described as "low".

Bank Indonesia is also working to resist the falling value of its currency, the rupiah. The central bank blamed the outward flow of capital on fears that the Federal Reserve would soon start to ‘taper' its asset purchases, and noted that similar pressure was being seen in most Asian currencies.

New Zealand: The Reserve Bank of New Zealand (RBNZ) held rates at 2.5% today, as monetary policy was pulled in different directions by an uneven recovery.

Governor Graeme Wheeler said growth was picking up, supported by increasing consumption and a recovery in the construction sector. However, he warned that new construction was not keeping pace with housing demand, leading to "rapid house price inflation" in Auckland and Canterbury.

Wheeler also said the New Zealand dollar remains overvalued, representing a headwind for the tradables sector, while fiscal consolidation acted as a further brake on growth. Inflation in New Zealand is currently just below the RBNZ's 1–3% target band, but Wheeler said he expected it to rise later in the year. He added the central bank expected to keep rates steady until the end of the year.

Thailand: The Bank of Thailand intervened in foreign exchange markets today to resist the fall of the Thai baht, according to local media reports. The baht has been sliding since late April, and fell 3.5% against the dollar in the last month.

The Thai baht operates under a managed float, with the central bank intervening to resist volatility but not fixing the rate. The government-run National News Bureau of Thailand reported today that finance minister Kittiratt Na-Ranong had voiced concerns about fluctuations in the exchange rate and urged the Bank of Thailand to "keep a close watch" on the situation.

The Bank of Thailand, however, stresses that a declining baht is not necessarily a bad thing for the economy due to the beneficial effects for exporters. Indeed, as recently as early May, the central bank had come under pressure from the government because the baht was appreciating too fast.

Korea: The Bank of Korea held rates today at 2.5%, as inflation remained low, at 1%, and the central bank predicted that a negative output gap would persist "for a considerable time".

Korea was also feeling the effects of fears over the end of quantitative easing, with stock markets showing "sharp declines", long-term interest rates rising and the Korean won depreciating "to a considerable extent".

The Philippines: The Central Bank of the Philippines also held rates today, maintaining the repo rate at 5.5% and the reverse repo at 3.5%.

Despite the turbulence elsewhere, the central bank was optimistic about the domestic economy. The inflation environment remains "benign", and there is "strong internal demand". "Ample liquidity and strong bank lending" have helped to support "firm" growth, the central bank said.