Indonesia’s central bank holds interest rates steady, as expected
It also kept the deposit and lending benchmarks unchanged at 5.5% and 7%, respectively
[JAKARTA] In a widely anticipated move, Indonesia’s central bank on Wednesday (Jul 17) opted to keep its interest rate at 6.25 per cent to bolster its currency while eyeing the possibility of a rate reduction in the fourth quarter of this year.
It also left its deposit and lending benchmarks unchanged at 5.5 per cent and 7 per cent, respectively, a move expected by 35 economists polled by Bloomberg.
Indonesia, heavily reliant on foreign inflows, is anticipating that the Federal Reserve could cut interest rates sooner than previously expected later this year.
Governor Perry Warjiyo suggested this potential move could bolster the future strength of the rupiah exchange rate.
“A cut will be possible if Indonesia maintains strong economic growth and low inflation,” Warjiyo said in a press conference.
“However, any decision must also take into consideration global economic conditions and be data-dependent,” he added.
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The rupiah, which has depreciated 4.8 per cent since early this year, is expected to strengthen further, Warjiyo said.
Bank Indonesia is actively auctioning its high-yielding securities, SRBI, aimed at attracting foreign inflows as part of a strategy to stabilise the currency.
As of last week, these auctions have attracted 775 trillion rupiah (S$64.5 billion) in inflows, marking a 16 per cent increase from the previous month’s auction.
South-east Asia’s largest economy is experiencing low inflation, with last month’s rate easing to 2.5 per cent, within the central bank’s target range.
The central bank has maintained its global growth outlook at 3.2 per cent for the current year, and anticipates strong economic performance through the second half of the year.
It has also reaffirmed its 2024 gross domestic product forecast, projecting an expansion of between 4.7 and 5.5 per cent.
Despite prospects for significant interest rate cuts on the horizon, analysts have cautioned that Indonesia remains vulnerable to exchange-rate fluctuations.
Radhika Rao, senior economist at DBS, cited increasing uncertainty surrounding fiscal sustainability, driven by debates over public debt and the fiscal deficit.
“We are mindful that the window for cuts hinges on the prevailing FX risks this quarter and the next. The incoming government’s fiscal bent and key ministerial appointees, especially for the finance portfolio, will also be matters of great interest,” Rao wrote in a note.
The rupiah traded around 16,150 to 16,250 per US dollar at the start of the week, unable to break below following the latest trade balance numbers which pointed to a narrower trade surplus and a return of dollar strength.
Rully Wisnubroto, senior economist at Mirae Asset Sekuritas, said concerns over potential twin deficits – widening current account and fiscal deficits – have sparked risk-off sentiment, potentially curbing capital inflows and impacting the stability of the currency.
“In our view, maintaining stability in the rupiah exchange rate remains the primary focus of Bank Indonesia’s current monetary policy,” he said.
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