Indonesia’s central bank keeps main rate unchanged but hikes deposit facility rate, to cut RRR

[JAKARTA] Bank Indonesia (BI) kept its benchmark interest rate unchanged, opting instead to cut the reserve requirements for banks and continue relying on targeted measures to support the rupiah through market volatility triggered by MSCI’s double-downgrade threat.

The central bank kept the BI-Rate unchanged at 5.75 per cent on Wednesday (Oct 21), as seen by 19 of 38 economists surveyed by Bloomberg. The other half expected a rate increase. 

The hold “is consistent with the strategy to stabilise the rupiah amid persistent external pressures”, to promote economic growth and to achieve an inflation target of 1.5 to 3.5 per cent, governor Destry Damayanti said in announcing the decision. 

She also announced that the reserve requirement ratio for banks, a measure of the amount of capital they must keep on hand, will be cut by one percentage point from next month and by another percentage point in December, potentially freeing more cash for lending.

The decision underscores BI’s caution against tightening policy prematurely and stalling growth in South-east Asia’s largest economy. The central bank has held rates steady since July, after delivering a total of 100 basis points in hikes earlier in the year.

The rupiah edged lower to 17,998 per US dollar after the decision while the 10-year government bond yield was steady at 7.45 per cent. The benchmark stock index was little changed after erasing earlier losses.

The move comes after MSCI warned it may demote Indonesia from emerging market to stand-alone status, bypassing the frontier-market tier that officials and analysts had initially been worried about.

It triggered the nation’s worst stock market slump in nearly three decades, with losses also spreading to bonds and the currency.

In her statement, Destry described the global economic outlook as “subdued” amid high oil prices, persistent inflation and weak growth, compared with a “solid” domestic economy supported by household consumption and government stimulus. 

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She added that the rupiah was being pressured by an expected tightening in US monetary policy and ongoing impacts from the Middle East conflict, as well as foreign investor sentiment in stocks.

The rupiah had weakened beyond 18,000 per US dollar amid a stronger greenback, elevated US yields and higher oil prices, while food prices pushed inflation to a three-month high in September.

Destry has favoured foreign exchange intervention, hedging incentives and other targeted measures over rate increases, which could weigh more broadly on domestic demand. However, sustained outflows could put further pressure on the rupiah, strengthening the case for a rate hike in coming meetings. BLOOMBERG