Policy actions diverged in the region, with Bank Indonesia (BI) maintaining its pause at 4.75%, while the Bangko Sentral ng Pilipinas (BSP) reduced rates by 25bp to 4.25%, in line with our expectations. This divergence reflects differences in growth, inflation, and currency dynamics. In Indonesia, base effects and seasonal demand have pushed inflation sharply higher at the start of the year, though the trend is expected to normalize from the next quarter. As a result, the real rate buffer has narrowed to 120bp in 1Q26, down from over 300bp in 2025. Amid rupiah underperformance, rising 1Q26 inflation, and the prospect of firm growth in 1Q26, BI is likely to feel less urgency to cut rates in the first half of the year. While the central bank acknowledged the scope for additional Fed funds rate cuts and viewed the rupiah as undervalued relative to fundamentals, we expect more market-stabilization measures to support the domestic currency and government bond markets, including SBN purchases in both primary and secondary markets. Authorities are also expected to monitor equity market movements closely ahead of the May MSCI review deadline and assess the impact on investor sentiment following the rating outlook revision, with several supportive measures already underway. We retain our baseline call for more cuts, likely in 2H26, monitoring rupiah movements and scale of US Fed cuts. The steepening bias in the IDR bond curve is expected to persist.
The BSP lowered policy rate by 25bp, accompanied by a cautious guidance in light of weaker-than expected recovery, besides softer confidence indices, and delay in government spending on graft-led uncertainty. Official growth forecasts were cut to 4.6% for 2026 and 5.9% in 2027 (vs 5.4% and 6.3% earlier). This takes BSP’s total easing to 225bp since this cycle began in August 2024. Inflation, while off lows remained benign at 2% yoy in Jan26, largely on higher utilities. Inflation projections were raised to 3.6% for 2026 from 3.2% previously, while keeping it close to 3% in 2027. BSP Governor Remolona had signaled earlier in the year that one more rate cut was likely, as early as Feb26, beyond which the benchmark rate was “very close to where we want”. Yesterday’s guidance was more uncertain, which implies that the door might be open for further easing if the recovery momentum stays weak (we expect one more 25bp cut). To complement an easing policy stance, the BSP lowered reserve requirement rates on a range of bank-issued instruments this month, freeing up liquidity for the domestic banking system.
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