Indonesia takes taper talk in stride, holds rates at record low

Jakarta

BANK Indonesia (BI) left its benchmark interest rate unchanged at a record low on Thursday, sustaining its support for a pandemic-hit economy and saying it's prepared to weather any volatility from the US Federal Reserve's more hawkish message overnight.

Indonesia's central bank kept the seven-day reverse repurchase rate at 3.5 per cent, as expected by all 30 economists surveyed by Bloomberg. It's the fourth straight month the rate has stayed at its record low, and BI previously has signalled it could remain at that level for the rest of the year.

"The decision is consistent with our low inflation projection and maintained rupiah stability and efforts to strengthen the national economic recovery," governor Perry Warjiyo told reporters in Jakarta. The central bank will keep policy accommodative to boost lending to businesses, which will help the economy recover, Mr Warjiyo said.

The move should help policy makers shield the rupiah from a renewed round of taper talk, after the Fed on Wednesday sped up its expected pace of policy tightening.

The rupiah, which is down 2.1 per cent against the US dollar this year, has been among currencies vulnerable to volatility as foreign investors shift their portfolios away from emerging markets.

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The rupiah fell as much as 0.9 per cent on Thursday, its largest drop since Feb 26, though most of the decline happened in the aftermath of the Fed decision, before BI's meeting. The country's benchmark stock index was down 0.2 per cent, while the yield on 10-year benchmark government bonds rose eight basis points to 6.5 per cent, its highest level since May 20.

"Bank Indonesia's decision to keep its policy rate unchanged at 3.5 per cent wouldn't be surprising in normal days, but it's especially to be expected coming right after the Fed's hawkish tilt overnight," said Wellian Wiranto, an economist at OCBC in Singapore. "While there remains a tail risk that BI might have to react to a new economic downturn domestically due to virus resurgence, its ability to cut rates further has been considerably slashed by the overnight global development. Hence, we now attach a very slim probability of any rate cut this year."

While some of its peers have started hinting at a policy shift, BI has pledged to keep policy accommodative as long as possible to support a soft economy that is struggling to get Covid-19 under control. Even after hitting a five-month high of 1.68 per cent in May, inflation remains well below the central bank's 2 per cent to to 4 per cent target.

Mr Warjiyo said global financial volatility should ease as the Fed's policy outlook becomes clearer. BI doesn't expect the Fed to begin tapering its asset purchases until the first quarter of next year, he added.

"We've been through global spillover episodes from time to time," Mr Warjiyo said, mentioning the "taper tantrum" in 2013 and massive outflows at the height of the pandemic last year. "Of course, we will continue to be vigilant and ensure the stability of exchange rates and financial markets." BLOOMBERG

READ MORE: Fed ripples hit Asian markets hardest as rates outlook shifts