Indonesia Stays on Hold as Fed Move Stokes Currency Fears

  • Central bank decision forecast by 21 out of 22 economists
  • Vice president had been calling for cut to boost growth

Indonesia’s central bank kept its benchmark interest rate unchanged for a 10th month, resisting pressure to cut amid concern the rupiah will weaken further following the Federal Reserve’s decision to increase borrowing costs.

Governor Agus Martowardojo and his board kept the reference rate at 7.5 percent, Bank Indonesia said in Jakarta on Thursday, as forecast by 21 of 22 economists surveyed by Bloomberg News. The authority also held the rate it pays lenders on overnight deposits, known as the Fasbi, at 5.5 percent.

The central bank is grappling with lackluster growth this year in Southeast Asia’s largest economy, and trying to stem a selloff of the rupiah hastened by fund outflows ahead of the U.S. monetary tightening. Slowing inflation had led to calls from Vice President Jusuf Kalla for a rate reduction, but policy makers recently indicated that cutting so soon after the Fed meeting risked stoking currency volatility.

“Given the uncertainty over what the Fed was going to do, and how cautious BI has been, today’s decision was no surprise,” said Gareth Leather, an economist at Capital Economics Ltd. “Provided the rupiah stabilizes, we wouldn’t be surprised to see a cut early in the New Year.”

Room to Ease

The rupiah, Asia’s second-worst performing currency this year, closed 0.5 percent stronger at 14,007 a dollar on Thursday before the rate decision, according to prices from local banks. The benchmark Jakarta stock index rose 1.6 percent.

Bank Indonesia said it needed to monitor external risks following the Fed move as well as the economic slowdown in China, in a policy statement with the decision. The room for monetary loosening was “getting bigger” because of slowing inflation, it said. Full-year inflation would be less than 3 percent, the central bank said, less than its 3 percent to 5 percent target range. Consumer prices rose 4.89 percent in November from a year earlier.

Earlier on Thursday, the Philippines left its benchmark interest rate unchanged for a 10th month, while Taiwan cut its policy rate for a second straight quarter.

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