Indonesia Can't Make Up Its Mind on Room to Cut Interest Rates

  • Rupiah stability at risk if rate cut, finance minister says
  • Chief economics minister, vice president see room for cut

So what does the Indonesian government want the central bank to do with interest rates? That depends on which official is speaking.

Finance Minister Bambang Brodjonegoro said Bank Indonesia can’t risk triggering renewed rupiah weakness by cutting interest rates. The comments in an interview on Thursday came a day after Darmin Nasution, the Coordinating Minister for Economics Affairs and a former central bank governor, said there was room for a rate cut.

Indonesia’s Vice President Jusuf Kalla and ministers have all put varying degrees of pressure on the central bank to cut rates this year to stimulate an economy that expanded less than expected in the third quarter. For its part, Bank Indonesia, which next meets on Nov. 17, said last month it sees room to ease policy after gains in the rupiah and as odds decline of a Federal Reserve rate increase this year.

“The more experienced Indonesian watchers will probably attach more weight to what BI senior officials would say,” said Wai Ho Leong, a Singapore-based economist at Barclays Plc. “There is now a stronger case for cutting rates before the Fed moves, compared to last month. So if last month was a close shave, then the growth disappointment should be a tipping point.”

Gross domestic product rose 4.73 percent in the three months through September from a year earlier, data showed Thursday, less than an estimate in a Bloomberg survey for 4.8 percent growth. Brodjonegoro said 2015 growth would be 4.8 percent at most. That rate would be the slowest since 2009.

“The bottoming pattern of our growth has been done in the second quarter, and hopefully this third quarter is on the recovering trend,” said Brodjonegoro. “But at least with what we have done so far, we have been able to go through the worst part of this slowdown in economic growth.”

Rupiah Volatility

Amid the concerns over the economy, the rupiah has fallen about 9 percent against the dollar this year, the second-worst performing currency in Asia after the ringgit. It touched a 17-year low in September of around 14,700 a dollar, and then surged 7 percent in October as investors pushed back Fed move expectations. The rupiah traded 0.2 percent higher at 13,535 as at 10:23 a.m. in Jakarta, according to prices from local banks.

“Currency is always our priority and stability of currency especially is very important,” said Brodjonegoro in the interview. “It means that we cannot take a risk by simply cutting the rate while we could jeopardize our exchange rate stability. When our exchange rate is close to 15,000, people are very nervous about the situation.”

The currency’s current level of around 13,500 a dollar is “probably close to the real effective exchange rate”, Brodjonegoro said. The currency is forecast to weaken again to 14,600 a dollar in 2016, according to a Bloomberg survey.

The impact of any Indonesian interest-rate cuts depends on how hard the central bank has to work to fight off rupiah bears. The central bank’s money-market operations have helped drive the one-month Jakarta Interbank Offering Rate to a six-year high, making bets on depreciation less appealing.

“Unless it becomes absolutely clear that the Fed would postpone rate hikes to later next year, we fear an early move to cut rate by BI would be negatively received by the FX market,” said Santitarn Sathirathai, an economist at Credit Suisse Group AG.

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