Interest rate surprises in Southeast Asia reveal deep political and economic shifts

How to account for these misses? At a bare minimum, the decisions indicate a more unsettled financial and political environment than previously assumed.

They are also a useful, if uncomfortable, reminder that turning points are tricky. And that guidance by central bankers themselves is rife with caveats.

It seemed a sure thing that Bank Indonesia would avail itself of another opportunity to juice growth despite frequently stating that it wants a stable currency. The rupiah is the worst performer against the dollar in the region this year and trades near a record low. But that hasn’t stopped Jakarta from delivering a series of shock rate cuts over recent months.

The head of the bank declared in September that he was taking an “all-out pro-growth” stance. The remarks appeared to be a hearty endorsement of President Prabowo Subianto’s goal of accelerating the economy’s expansion.

So when policy was kept unchanged at the latest meeting, it was another bombshell. Not much had shifted in Indonesia’s top-line economic numbers since its September decision. Why not go ahead and ease again? Inflation is contained and the intensified US-China trade war is widely expected to clip gross domestic product (GDP). Understandably, economists had overwhelmingly predicted further easing. It wasn’t to be.

Perhaps the rupiah’s frailty does bother officials more than they let on; authorities wade into the market regularly to cushion its decline. With the dismissal of Sri Mulyani Indrawati, the finance minister whose house was targeted by rioters during nationwide disturbances in August, the bank may be trying extra hard to promote its independence bona fides.

Or maybe the real forecasting fault was a failure to foresee the decision to cut just weeks after the protests, unrest that reflected—at least in part—rising public anger at entrenched income inequality.

Under this scenario, political developments made it imperative to bring borrowing costs down at the first opportunity. By the time of the 22 October Bank Indonesia meeting, social stability had “improved, reducing headwinds on confidence,” Helmi Arman at Citigroup in Jakarta said in a note. “In this case, the timing of the next cut hinges on the political situation, which has so far been fluctuating in short cycles.”

Politics isn’t absent in any discussion about Thailand, either. The government, which has comprised a series of shaky coalitions since 2023, has indulged in frequent criticism of the Bank of Thailand. Officials dragged their feet, the arguments went, and they must do more to aid the economy, which suffers from deflation. Once the term of former governor Sethaput Suthiwartnarueput ended, ministers installed a champion of easy money.

Surely, the reductions to come would be swift and substantial. At his first meeting, however, the new chief, Vitai Ratanakorn, kept rates unchanged. While this is probably just a question of timing, given the darkening global picture, Vitai may have wanted to demonstrate to the market that he isn’t quite a pushover; he may have firm views, but pragmatism also plays a role. The outgoing governor might also have made it easier for him to stand firm, having presided over 100 basis points of cuts in the prior year.

Economists may have gotten so used to being spoon-fed by central banks that they aren’t allowing for the unexpected. It’s a hard truth that policymakers can be misinterpreted or that their pronouncements, even when forthright, have a use-by date. What made the Philippines cut so startling was the observation by the governor that the-then level of borrowing costs had a “goldilocks” quality to it. In other words, it was just right. If you can’t take the governor at his word, who can you listen to?

Some local considerations played a role. But the Philippines will be buffeted by the same shifts that are affecting Indonesia and Thailand, as well as many other emerging markets. While global growth has held up remarkably well in the face of the tariff chaos unleashed by US President Donald Trump, there’s little clear sailing for anybody. Southeast Asia rose to prosperity largely on the back of trade. The coming era will not be quite so benevolent.

The rate misses send a discomforting message about where the region finds itself. Economists need to be more nimble and maybe they need to take a wider view. It’s time for scepticism. ©Bloomberg

The author is a Bloomberg Opinion columnist covering Asian economies.