Bank Indonesia keeps rates steady as expected

[JAKARTA] Indonesia’s central bank held its key interest rate steady on Wednesday (Aug 21), opting not to lower it despite the rupiah’s recent gains.

Bank Indonesia maintained its rate at 6.25 per cent, aligning with market expectations as surveyed by Bloomberg. It also left its deposit and lending benchmarks unchanged at 5.5 per cent and 7 per cent, respectively.

Governor Perry Warjiyo stated that the decision was made to sustain the rupiah’s recent strengthening and maintain its stability.

“We hope that the strengthening of the rupiah will boost economic growth, particularly in export-oriented sectors, and create financial stability, especially within the banking sector,” he said at a press conference.

Warjiyo continues to signal a dovish outlook on monetary policy, hinting at further easing while remaining cautious about external risks. These include a potential reduction in the Fed’s rate and high US Treasury yields, which could reverse foreign capital flows and put pressure on the rupiah.

The central bank has begun to ease gradually using its market instrument SRBI, which is now being offered at lower yields and with auction dates reduced to once a week.

The rupiah has risen roughly 5 per cent against the dollar this month, bolstered by growing expectations of a US policy rate cut.

Indonesia’s projected moderate fiscal deficit of 2.53 per cent next year under President-elect Prabowo Subianto is slowly drawing investors back to the bond market.

South-east Asia’s largest economy saw over US$1 billion in foreign capital inflows into sovereign bonds this month, offsetting outflows for the year.

Some central banks have started easing policy, including in the Philippines and New Zealand. The Bank of Thailand on Wednesday held its key interest rate steady.

Despite prospects for significant interest rate cuts on the horizon, UOB economist Enrico Tanuwidjaja cautioned that Indonesia remains vulnerable to exchange-rate fluctuations.

A surprising decline in the trade surplus last month may indicate that the currency’s stability remains volatile.

Indonesia’s trade balance surplus plummeted to US$470 million in July, a significant drop from US$2.39 billion in June and the lowest surplus since May 2023.

Satria Sambijantoro, head of research at Bahana Sekuritas, anticipated increased volatility, noting that the rupiah’s recent gains were largely driven by short-term flows and short covering rather than fundamental improvements in trade terms.

He explained that Indonesia could benefit from rotational flows to Asean, with the rupiah’s strengthening reflecting broader shifts in emerging markets.

“Note how recent strengthening of Asean currencies coincided with weakening of their Latin America peers, in line with superior growth and fiscal fundamentals of South-east Asian economies,” Sambijantoro said.

“At the current elevated prices of oil and other commodities, policy easing from the Fed (or BI) might only reignite inflationary pressures, entrapping central bankers in policy missteps that ultimately could force a hawkish turn.”

BI expects inflation to stay within the 1.5 to 3.5 per cent target range and continues to forecast that Indonesia’s economy will grow between 4.7 and 5.5 per cent this year.

The central bank reported that loan growth in July reached 12.4 per cent. Given the ample banking liquidity, it anticipates that credit disbursements for the full year will approach the upper end of the 10 to 12 per cent range, indicating the lending market does not require immediate monetary stimulus.