Home Africa Indonesia, Sri Lanka, Paraguay and Egypt Prolong Rate Cuts

Indonesia, Sri Lanka, Paraguay and Egypt Prolong Rate Cuts

Stockholm (Ekonamik) – For the second consecutive month the Bank of Indonesia (BI), the south-Asian nations central bank, lower interest rates by 25bps to 5.5% at its August monetary policy meeting. The Central bank of Egypt and the Central Bank of Paraguay also cut rates by 150bps and 25bps to 14.75% and 4.25%, respectively. The Central Bank of Sri Lanka also cut rates from The other central bank meeting this week, the Bank of Zambia, did not change its policy rate.

The decision of the BI came as a surprise following the July 18th meeting’s 25bps rate cut to 5.75%. “The policy is consistent with low inflation projected below the midpoint of the target corridor, attractive returns on domestic financial investment assets that support external stability, as well as a pre-emptive measure to safeguard economic growth momentum moving forward against the impact of global economic moderation,” the central bank argued in the accompanying August press release.

International trade concerns loomed ominously over the decision. “Ongoing trade tensions coupled with geopolitical risks are undermining world trade volume and global economic growth,” the central bank added, repeating the exact same line as in the previous month. “A softening of growth is predicted in the United States as exports decline along with non-residential investment. Flatter economic growth in Europe, Japan, China and India is the result of restrained external sector performance and dwindling domestic demand.”

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“Bank Indonesia unexpectedly loosened its monetary policy by cutting the 7-day reverse repo rate by 25 bps to 5.50%,” said Josua Pardede, Vice President-Economist at PermataBank, one of Indonesia’s largest banks. “Going forward, the room for further accommodative BI policy mix is still seen open in the coming months taking into account rising downside risk on domestic economic growth. BI has slashed the rate twice before the FOMC meeting suggests its rising concern on domestic growth prospect, not only for this year but also for 2020 since the monetary policy transmission will take 6-12 to have an impact to economic growth.” Going forward Mr Pardede and his team believe another 25bps cut to be rather likely in September as well as a decrease in reserve requirements.

In Sri Lanka, the central bank focused on the external sector. “The trade deficit continued to improve during the first half of 2019 with the sustained growth of exports and the notable contraction in the growth of imports.” An important factor in the performance of the sector were the Easter terrorist attacks and the effect they had on tourism and investment. “Tourist arrivals, which were impacted by the Easter Sunday attacks, continued to recover from the month of June. Workers’ remittances recorded marginal growth in June, although a cumulative moderation was observed during the first half of the year.”

The central bank was hopeful regarding the duration of the attacks’ effect on financial markets. “Foreign financial flows, in the meantime, have been mixed with a net outflow from the Government securities market and a net inflow to the stock market, including primary inflows, thus far during the year. The Sri Lankan rupee appreciated against the US dollar by 2.4% so far during the year, although some depreciation pressure was experienced during the past few days. The depreciation pressure, mainly driven by foreign withdrawals from the Government securities market by a few investors, is expected to be short-lived.”

However, the slow outlook for growth motivated August rate cut. “Prevailing economic conditions and the developments observed in leading indicators point to modest economic growth during 2019 as well. Although economic growth is expected to recover gradually towards its potential in the medium term, domestic and global headwinds are likely to delay this recovery. Therefore, it is essential that the available policy spaces are utilised to support productive economic activity without disrupting the improvements achieved in relation to macroeconomic stability ”

The Paraguayan central bank highlighted global as well as regional concerns in its decision. It noted that “uncertainty has intensified in the last few weeks, mainly due to the lack of clear signs of a resolution of trade tensions between the United States and China. This context has been reflected by a deceleration of global economic activity, which has negatively affected the growth prospects of the world’s leading economies.”

The Paraguayan policy-makers echoed the concerns later voiced at Jackson Hole that central bankers could only do so much when instability comes from domestic politics. “Under this scenario, an even more accommodative monetary policy stance of the Federal Reserve is expected in the next months.” The global instability was reflected in regional instances of economic uncertainty, despite earlier hopeful expectation for Argentina and Brazil. “Likewise, in the region, the economic outlook has become more complex in the last few weeks, especially after the primary elections in Argentina, while the latest data about the economic activity in Brazil indicate lower growth rates.”

The drivers of the rate cuts in Egypt were more domestically focused. With the lowest inflation levels in four years the CBE felt confortable cutting rates too. “Annual headline and core inflation continued to decline to record 8.7% and 5.9% in July 2019, respectively, the lowest rates in almost four years, notwithstanding the recently implemented fiscal consolidation measures that reached cost recovery for most fuel products.”

Here too, the central bank did not fail to note the global environment. “Globally, the expansion of economic activity continued to weaken, financial conditions eased, and trade tensions continued to weigh on the outlook. International oil prices recently declined, yet remain subject to volatility due to geopolitical risks and potential supply-side factors.”

Image from Wikicommons

Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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