BI could raise key rate on Thursday to defend rupiah

Jakarta

INDONESIA'S Central bank will raise its key interest rate on Thursday to support the rupiah and stabilise domestic markets, a majority of economists in a Reuters poll said.

Thirteen out of 21 economists polled said Bank Indonesia (BI) would follow up on its recent comments about having room to adjust the seven-day reverse repo rate by hiking it by 25 basis points to 4.5 per cent. The other eight said BI would keep the rate where it has been since September, when there was a 25 basis-point cut. The last time BI hiked its benchmark was in November 2014.

Agus Martowardojo, whose term as governor ends late this month, has said he would be prepared to raise the benchmark if the rupiah's depreciation threatened BI's 2018 inflation target of 2.5-4.5 per cent or financial stability. Indonesia and other emerging markets have been hit this year as US bond yields rose and the dollar rallied, deepening concerns about capital outflows.

The rupiah has lost more than 5 per cent against the dollar since late January despite central bank intervention, and in recent weeks has traded near its weakest level since December 2015. Yields on government bonds rose across the curve last week and foreigners continued to dump Indonesian stocks.

Also denting views on Indonesia was how first quarter economic growth was slower than expected, at 5.06 per cent, as private consumption remained sluggish.

The central bank has tried to accelerate growth, cutting the benchmark 200 basis points in 2016 and 2017 combined, and easing lending rules.

Annual inflation in April was 3.41 per cent, comfortably inside BI's target range. While the current account deficit is expected to widen, it is likely to stay in a range BI considers healthy.

"Overall, the macro picture argues for interest rates to remain at current levels. In our view, raising the interest rate now risks stifling the recovery in the investment environment," ANZ, among the eight predicting a rate hold on Thursday, said in a research note. Those who think BI should raise this week say the sell-off in emerging markets may linger and economies with current account deficits are more vulnerable.

"It's not local inflation that's the worry, but rather the harsh winds blowing in from overseas," said Frederic Neumann, co-head of Asia economics research of HSBC, who called Indonesia among the most exposed.

Rating agencies have warned of repercussions from prolonged pressures to the Indonesian markets.

Moody's said if the currency and bond-price weaknesses persist, it would be credit negative for sovereign ratings. Fitch said the rupiah's depreciation could exacerbate a cash flow squeeze for Indonesian homebuilders.

Perry Warjiyo, a current deputy governor and Mr Martowardojo's successor, has vowed to support economic growth while maintaining stability.

Of five poll participants who responded to a question on the benchmark's level at end-2018, three predicted 4.5 per cent and the other two said 4.75 per cent. REUTERS