Bank Indonesia stands pat on key interest rate

Jakarta

INDONESIA'S central bank left its benchmark interest rate unchanged for a third straight month, saying the economic outlook is improving even as the door remains open for future rate cuts.

Bank Indonesia (BI) kept the seven-day reverse repurchase rate unchanged at 5 per cent Thursday, as predicted by 29 of 34 economists surveyed by Bloomberg. The others expected a reduction of 25 basis points.

"Is there room to cut rates? Yes. Will Bank Indonesia use it? Not yet," governor Perry Warjiyo told reporters after the decision.

A spike in risk appetite, boosted by a "Phase One" trade deal struck by the US and China, has been driving inflows into emerging markets, spurring on Indonesia's currency and pushing bond yields lower. That takes the pressure off policymakers to act, although Mr Warjiyo stressed policy will remain accommodative.

"Today's decision can best be described as a dovish hold," said Joseph Incalcaterra, Asean economist at HSBC Holdings Plc. "While the central bank took comfort in the fact that the latest global and domestic data all point to improving growth, BI clearly signalled room for further rate cuts. Given that we forecast growth to remain below Bank Indonesia's 5.1 to 5.5 per cent target in the short term, we see a further 50 basis points of rate cuts this year."

The rupiah has gained 2.5 per cent against the dollar over the past month, making it Asia's top performer. Foreign investors have pumped more than US$1.5 billion into Indonesian government bonds so far this year.

The currency pared gains after the decision, while the Jakarta Composite Index was little changed. Indonesia's 10-year government bonds were headed for a sixth day of gains.

Emerging markets from Argentina to Malaysia have kicked off the year with rate cuts to bolster their economies amid an uncertain global backdrop. Bank Negara Malaysia unexpectedly reduced its benchmark rate by 25 basis points Wednesday in what it said was a pre-emptive move.

In Indonesia, growth of about 5 per cent remains a worry for policymakers. In a briefing for Thursday's rate decision, BI officials said the economy had already bottomed out and would grow around 5.3 per cent this year, after an estimated 5.1 per cent expansion in 2019.

In his briefing, Mr Warjiyo raised concerns about lacklustre loan growth - estimated at just 6.1 per cent in 2019 - as well as the pace of intermediary functions in the banking sector. Even the 10 to 12 per cent loan growth expected this year "is not yet optimal", Mr Warjiyo said.

"It's time to invest. It's time to be confident," he said at the end of his remarks.

"It looks like they're still hoping banks would start to pass on the 100 basis points in rate cuts from last year, although the loan-growth target of 10 to 12 per cent for 2020 will remain ambitious," said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore. "Overall, BI is trying to strike a confident tone on growth, talking about lower uncertainty globally and higher investment domestically."

Inflation is slowing, giving the central bank room to lower borrowing costs in coming months if further stimulus is needed. Consumer prices rose 2.7 per cent in December from a year ago, the slowest pace of growth since March. BI has lowered its inflation target band to 2 to 4 per cent this year, from 2.5 to 4.5 per cent in 2019.

The current-account deficit remains a risk for the economy, although the trade deficit improved significantly to US$3.2 billion last year from US$8.6 billion in 2018.

Mr Warjiyo sought to calm fears over the appreciating rupiah. President Joko Widodo recently expressed concern about the currency gaining too quickly, warning it could hurt exporters.

"Overall, the impact of rupiah appreciation is positive," the governor said. "It will help with imports of raw materials for investment." BLOOMBERG