Indonesia central bank holds rates, cites global volatility for weaker rupiah

INDONESIA’S central bank left interest rates unchanged at a record low on Thursday (Jul 21), but stepped up monetary policy normalisation on other fronts, while blaming weakness in the rupiah currency on global market volatility.

Bank Indonesia (BI) said the current level of the benchmark 7-day reverse repurchase rate of 3.50 per cent remained consistent with its low forecast for core inflation and the impact of global economic growth slowdown on the domestic economy.

BI is one of a few major Asian central banks that have not lifted interest rates from pandemic-era levels. Its decision to not to shift them on Thursday was predicted by most analysts polled by Reuters.

"Even though we decided that the BI rate would remain at 3.50 per cent, we are accelerating normalisation or the response of monetary policy," governor Perry Warjiyo told an online news conference.

BI will raise the interest rate structure in the money market, strengthen rupiah stabilisation measures to control imported inflation and sell some of its large holdings of government bonds, a move that will push bond yields up, Warjiyo said.

Growth in South-east Asia's largest economy would be biased towards the lower end of BI's estimate of 4.5 per cent to 5.3 per cent as slowing global economic growth could drag down exports, while higher inflation would affect private consumption, he said.

The end-2022 headline inflation forecast was raised to 4.5 per cent to 4.6 per cent, from 4.2 per cent previously, but Warjiyo said core inflation would stay within BI's target range of 2 per cent to 4 per cent.

Many central banks around the world have been raising interest rates to battle soaring inflation.

The European Central Bank will discuss whether to raise interest rates by a bigger-than-expected 50 basis points later on Thursday, while the US Federal Reserve is expected to announce another hefty rate hike next week.

Analysts have warned BI that keeping rates unchanged will widen differentials with other countries, making Indonesian assets less attractive for foreign investors and putting downward pressure on the rupiah.

Warjiyo said that, fundamentally, the rupiah should be strengthening, because exports were strong and the current account could post a surplus this year, but he noted that global events were pressuring currencies around the world.

The 2022 current account could come in between a surplus of 0.3 per cent of gross domestic product (GDP) and a deficit of 0.5 per cent, he said. Previously, BI forecast a deficit of 0.5 per cent to 1.3 per cent of GDP. REUTERS