Indonesia central bank sees no need for more rate hikes

INDONESIA’S central bank will likely not need to raise interest rates further as last month’s hike has attracted capital inflows and stabilised the currency amid a better-than-expected global backdrop, governor Perry Warjiyo said on Wednesday (May 8).

In a rare media briefing, Warjiyo said Bank Indonesia (BI) was making efforts to further strengthen the rupiah’s exchange rate against the US dollar, beyond 16,000 per dollar, around where the currency is presently hovering.

“The decision regarding the BI rate will always take into account inflation outlook, exchange rate and economic growth,” the governor said.

“Everything remains data dependent, but the trajectory, based on current data, shows that there is no longer a need to increase the BI rate,” Warjiyo said.

The rupiah fell to 16,285 per US dollar last month, its lowest since the Covid-19 pandemic, as rising tensions in the Middle East and delayed expectations of US rate cuts prompted capital outflows from emerging economies. This triggered BI’s April rate hike.

Data from the central bank earlier on Wednesday showed its support for the currency contributed to a US$4.2 billion fall in foreign exchange reserves in April, the biggest drop in 11 months.

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So far this month, there has been a total of US$1.42 billion worth of net capital inflows into Indonesia’s financial markets, including from non-resident buyers of BI’s rupiah-denominated securities sales.

Along with BI’s rate hike, the main factor behind the rupiah’s appreciation was “less hawkish” statements by the Federal Reserve officials, Warjiyo said, adding it was more likely that there will be at least one US interest rate cut this year, instead of none.

BI has raised rates by a total of 275 basis points since starting its post-pandemic rate hiking cycle in mid-2022. Economists said the monetary tightening could hurt Indonesia’s growth outlook.

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However, BI’s relaxation of rules on bank reserve requirements will provide additional liquidity to the system starting in June, which will support lending and economic growth, the governor said.

First-quarter annual economic growth of 5.11 per cent was better than BI had predicted and growth will still be above 5 per cent this quarter, providing more confidence for portfolio investors to return to Indonesia’s markets, Warjiyo said.

Headline inflation has also eased and Warjiyo predicted a rate of 3.2 per cent at end-2024, within BI’s 1.5 per cent to 3.5 per cent target range, with core inflation at 2.6 per cent. REUTERS