Bank Indonesia holds key rate as hawkish Fed bets sink rupiah
INDONESIA’S central bank stood pat for a seventh straight meeting to help the rupiah weather an emerging-market sell-off triggered by the prospect of further tightening by the Federal Reserve.
Bank Indonesia (BI) kept the seven-day reverse repurchase rate at a four-year high of 5.75 per cent on Thursday (Aug 24), as predicted by 28 of 30 economists surveyed by Bloomberg. Two had expected a quarter-point increase to take the benchmark to 6 per cent, returning to the level last seen in 2019.
The move is in line with governor Perry Warjiyo’s signal on Tuesday that the monetary authority need not match the Fed’s pace, even as a quarter-point hike in the US would take both nations’ policy rates to unprecedented parity.
According to Warjiyo, BI can sufficiently anchor the rupiah through its “Operation Twist” bond market interventions, propping up short-term yields to lure inflows. That strategy faces a tough test of turning investor appetite though – foreign funds have already sold US$127 million worth of Indonesian bonds so far this August, according to data compiled by Bloomberg.
The greenback has been strengthening against emerging-market currencies this month, amid indications the Fed could keep rates higher for longer as the US looks likely to avoid a recession. The rupiah has weakened over 1 per cent so far this August, though it has clawed back some gains in the last three days.
Adding to the currency pressure is a global commodity slump that is fast eroding Indonesia’s trade surplus. The current account swung back to a US$1.9 billion deficit in the second quarter. Foreign reserves remain adequate, though the take-up of a BI facility to attract US dollar export earnings remains tepid.
A NEWSLETTER FOR YOU
Friday, 8.30 am
Asean Business
Business insights centering on South-east Asia's fast-growing economies.
While the spectre of rate hikes has reappeared among analysts, BI remains wary of tightening further due to fears economic growth could slow in the second half of 2023. Bank lending, retail sales and consumer confidence are softening. Inflation has also long returned to the central bank’s 2 per cent to 4 per cent target, with BI expecting it to stay in range.
Warjiyo on Thursday said that the global outlook remains uncertain, with a weaker recovery in China seen influencing the world economy. That necessitates a strong policy response to mitigate contagion risks, he said, while still retaining the 4.5 per cent to 5.3 per cent economic growth view for Indonesia in 2023.
Credit demand grew 8.54 per cent in July, Warjiyo said, adding that BI expects loan requirement to increase in line with the domestic economy’s strong performance.
To support the economy further, BI has already announced allowing banks to cut their reserve requirement ratio by nearly half when they lend to priority sectors, starting from October. BLOOMBERG
Share with us your feedback on BT's products and services
