Whatever it takes! Indonesia and the Philippines decisively hiked again to protect price stability

E merging Asia is not immune to tighter USD liquidity and heightened uncertainty regarding trade-war , Brexit and China slowdown , but central banks in the region are making it clear that they prioritize price stability by doing what ever it takes to instill investors’ confidence. Today, both Indonesia and the Philippines surprised m arkets with a 25bps hike even as they face less market pressure . The first line of defense for current account deficit countries is the current account itself and the way to do so is to tighten monetary condition s to reduce demand for imports . B oth Indonesia and the Philippines chose dec isive actions because their funding gap widened when risk premium rose. For Indonesia, the current account deficit increased to 3.4% of GDP in Q3 20 18. Meanwhile , the Philippine s’ deficit expanded to -3 .6% in Q2 2018 . And these actions highlight their strong commitment to tame the current account even when the tide turns more favorable. For example, Indonesia 10-yr government bond rallied by 50bps to 8.1% from 8.6% since end October 2018 ( Chart 4 ). The IDR, too, strengthened versus the USD by 3.8% ( Chart 5 ) – making it the best performing currency month -to-date . The Philippine peso also stre ngthened versus the USD by 1.5%. Despite 175bps rate hike, we do not expect Indonesia’s growth to be materially impacted by tighter monetary conditions . Indonesia is the least indebted country i n emerging market s , and that means that the transmission of monetary policy to the real economy acts with a significant lag. Given Indonesia and the Philippines ’ aggressive actions so far this year, investors can feel confident that th e s e central banks are committed to ensure price stability. And as we argued in August, emerging Asia is in a strong position to ride out the storm thanks to already ample buffers , and most importantly, steady captains at the helm of the ship .