Indonesia central bank keeps policy rate unchanged at 6% for a fourth straight month

 Elisa Valenta
Published Wed, Feb 21, 2024 · 03:51 PM
    • Bank Indonesia governor Perry Warjiyo says the key rate is enough to manage inflation, while other tools are geared to support growth.
    • Bank Indonesia governor Perry Warjiyo says the key rate is enough to manage inflation, while other tools are geared to support growth. PHOTO: REUTERS

    [JAKARTA] Indonesia’s central bank kept its benchmark interest rate steady at 6 per cent for a fourth consecutive month on Wednesday (Feb 21) as it sought to shield the still vulnerable rupiah from further volatility.

    Bank Indonesia (BI) governor Perry Warjiyo said that leaving the key policy rate unchanged was consistent with efforts to stabilise the rupiah and ensure inflation remains in check.

    The rupiah, which is down by about 1.7 per cent against the US dollar since the start of the year, has performed better than many of its regional peers.

    The governor said the rupiah – which traded at 15,634 to the greenback as at 8 pm on Wednesday – should remain stable and appreciate further.

    The currency will be supported by the central bank’s intervention in the spot, non-deliverable forward and bond markets. There will also be the continued sale of rupiah and dollar securities that could bring in greater inflows, he said.

    From the middle of January to the middle of February, BI said that Indonesia saw capital inflows totalling US$150 million into both the bond and stock markets.

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    This surge was predominantly fuelled by stock inflows amounting to US$770 million. Conversely, there were bond outflows recorded at US$230 million over the roughly four-week period.

    Inflation under control

    Indonesia’s inflation rate has stayed within BI’s targer range of 1.5 to 3.5 per cent since July 2023, with the bank’s 250 basis-point rate hiking cycle between August 2022 and October 2023 helping to keep price pressures in check.

    With inflation under control, Warjiyo said the central bank has room to leave its policy unchanged until the second half this year.

    He said that the central bank’s baseline scenario is that it could pivot sometime in the second half of the year, adding that there was also an expectation for the US Federal Reserve to cut rates around the same time.

    “The BI rate will be kept unchanged for some time. Be patient. Until when? We have already given a hint that the baseline plan is in the second half,” said Warjiyo. He pointed out that any easing would largely depend on inflation and the movements in the rupiah’s exchange rate.

    Economists said that further tightening was necessary to prevent capital outflows.

    Teuku Riefky, an economist from the University of Indonesia, flagged the need for the authorities to monitor a non-committal stance by the Fed.

    “This measure is essential for preventing capital outflow and ensuring control over the rupiah’s exchange rate,” he said in a note.

    The markets had cheered the victory of Defence Minister Prabowo Subianto at last week’s presidential election, after preliminary counts by independent pollsters showed that the 72-year-old had won with nearly 60 per cent of the votes.

    The central bank kept its growth forecast for 2024 at a range of 4.7 to 5.5 per cent, with household consumption likely to pick up in the coming months.

    But with sluggish export performance dragging down Indonesia’s economic growth in 2023, analysts said that domestic demand growth is expected to still be lower than pre-pandemic levels.

    “We have priced in a potential BI rate cut this year should domestic demand growth be lower than expected,” said UOB analysts in a note on Wednesday.

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