Indonesia central bank holds rates, keeps eye on rupiah

MARCH 22, 2018 - 8:00 PM

[JAKARTA] Indonesia's central bank on Thursday kept its policy rate unchanged, as expected, saying its stance was sufficient to support the economy and pledged to keep the rupiah currency in line with fundamentals.

The decision came shortly after the Federal Reserve, as anticipated, hiked US rates. Central banks in New Zealand, the Philippines and Taiwan also held their policy rates on Thursday.

The Bank Indonesia (BI) decision "is consistent with efforts to maintain stability... and pushes domestic economic recovery,"spokesman Agusman told reporters.

BI held its seven-day reverse repurchase rate at 4.25 per cent, where it has been since a 25 basis point cut in September.

"We also view the current policy stance to be appropriate - the mediocre growth momentum is not related to the level of interest rates but other structural issues," ANZ economist Sanjay Mathur said in a note.

BI cut the benchmark by 200 basis points in 2016 and 2017. The last time it hiked the key rate was November 2014.

The central bank said it expected first quarter economic growth to be better than one year earlier. BI is targeting GDP growth of 5.1-5.5 per cent this year, still well below President Joko Widodo's target of 7 per cent annual growth.

BI said it remains aware of the "increasing risk of global financial market uncertainty" and will keep taking steps to"stabilize the exchange rate in accordance with its fundamental value while maintaining market mechanisms." Central bank officials have said BI is committed to maintaining a presence in the foreign-exchange market to stabilise the rupiah, but said room for further easing of monetary policy is limited.

The deposit facility and lending facility rate were also unchanged, at 3.50 per cent and 5.00 per cent, respectively.

Some economists say BI will eventually have to follow the Fed and hike rates to support the rupiah, which this month fell to 13,800 to the US dollar, its weakest in more than two years.

But so far, inflation is in check, helping BI hold the key rate as it tries to help boost sluggish lending and growth. Annual credit expansion was single-digit in 2017, while tepid consumption kept growth from rising to much above 5 per cent.

Indonesia's loans at the end of January were 7.4 per cent larger than a year earlier, the financial regulator said on Thursday, down from 8.35 per cent in December 2017.

The rupiah, which has weakened about 1.2 per cent this year against the US dollar, on Thursday afternoon was trading at about 13,750 per dollar.

Yoga Affandi, a BI director, said it does not target a rupiah level, "but it's in line with the inflation targeting framework".

February's annual headline inflation rate was 3.18 per cent, well within BI's target range.

BI officials said the US$3.9 billion drop in Indonesia's foreign exchange reserves in February stemmed mainly from intervention to prevent the rupiah from weakening too sharply.