Indonesia Holds Rate as Rupiah Risks Prevent Monetary Easing

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Indonesia’s central bank kept its main interest rate unchanged for a sixth month as China’s unexpected devaluation of the yuan increased pressure on the rupiah, reducing scope for monetary easing.

Governor Agus Martowardojo and his board held the reference rate at 7.5 percent, Bank Indonesia said in Jakarta on Tuesday, as predicted by all 17 analysts surveyed by Bloomberg. The authority also maintained the rate it pays lenders on overnight deposits, commonly referred to as the Fasbi, at 5.5 percent, as forecast.

The central bank refrained from easing even after data released earlier in the day showed a deepening in the export slump that’s hurting Southeast Asia’s biggest economy. The monetary authority said today it will guard the rupiah as the currency added to declines that have made it among Asia’s worst performers this year.

“The fundamentals are putting them into a position where they should be much more dovish than they are, however, the financial market is handcuffing them from actually taking policy action,” said Daniel Wilson, a Singapore-based economist at Australia & New Zealand Banking Group Ltd., who sees 50 basis points of rate cuts by the end of the year. “Rupiah stability is probably the key priority at the moment.”

The Indonesian currency fell 0.3 percent to 13,822 a dollar as of 4 p.m. in Jakarta. It has weakened 10.3 percent this year, the worst performer after the ringgit among 11 Asian currencies tracked by Bloomberg. The benchmark stock index dropped 1.6 percent.

Maintain Stability

Bank Indonesia will buy bonds in the secondary market for foreign-exchange stability, Deputy Governor Perry Warjiyo said after the rate review. The central bank will also optimize reverse-repurchase operations, central bank bills and certificates of deposit to manage excess short-term liquidity, said Senior Deputy Governor Mirza Adityaswara.

The macroprudential policies are accommodative and this year’s inflation target, of 3 percent to 5 percent, can be achieved, Warjiyo said. Consumer prices rose 7.26 percent in July from a year earlier, matching the rate in June that was the fastest pace since December.

China’s decision this month to allow the biggest depreciation of the yuan in two decades should be viewed as part of monetary easing, which Indonesia cannot afford, Nanang Hendarsah, a director at Bank Indonesia, said last week. The Southeast Asian nation’s policy makers are also bracing for an impending U.S. rate increase.

Revamped Team

President Joko Widodo predicted gross domestic product will increase 5.5 percent next year and forecast a stronger rupiah than current levels in his first full-year budget last week. He also unveiled a revamped economic team that includes a former central bank chief and a private equity investor.

Indonesia sees room for further yuan depreciation, and would like to see the Fed raise rates sooner, although the devaluation makes that less likely, Finance Minister Bambang Brodjonegoro said in an interview last week.

“There’s a trade-off dilemma between aiding the economic recovery” and managing currency stability, Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG, said before the decision. “Inflation is still quite elevated, and there’s also a Fed hike uncertainty on the horizon.”