Indonesia Holds Rate Even as Rupiah Gain Opens Window to Cut

  • Central bank sees room for monetary loosening, rupiah gains
  • Bank Indonesia to prioritize domestic factors in policy easing

Indonesia’s central bank kept its main interest rate unchanged for an eighth month, while signaling it sees room to ease policy amid recent gains in the rupiah and declining odds of a 2015 Federal Reserve rate increase.

Governor Agus Martowardojo and his board held the reference rate at 7.5 percent, Bank Indonesia said in Jakarta Thursday, as predicted by all 25 economists 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 rupiah’s rebound this month has reduced pressure on policy makers to shore up the currency, which would be vulnerable to capital outflows should U.S. rates rise. Bank Indonesia, grappling with the slowest economic growth since 2009, is opting to wait instead of joining neighboring Singapore in easing monetary policy this week.

“Clearer signals that the U.S. Federal Reserve is on hold or that the Indonesian economy is in a more severe deterioration” remain the key pre-requisites for near term monetary policy action at this time, Glenn Maguire, an economist at Australia & New Zealand Banking Group Ltd., said in a note after the decision.

The rupiah strengthened 9.1 percent in its best performance since 2001 last week as emerging-market assets rebounded on signs the Federal Reserve will keep borrowing costs lower for longer. It gained 1.2 percent on Thursday before the rate decision.

“We don’t rule out the possibility that the BI rate can be lowered,” Juda Agung, executive director of monetary policy at Bank Indonesia, told reporters. “Going forward we will look at factors or risks to the macroeconomy to ensure it remains manageable and inflation is below the target, so the room to ease monetary policy will become more open.”

The central bank’s projection is that “there is room,” he said. The authority will take into account inflation, the current account, delays in the Fed plan to raise rates and October capital inflows in deciding on policy easing, he said.

“The timing of course can’t be rigidly defined,” he said. “But there’s room, the policy space for that is wider now.”

The rupiah’s rebound in the past few weeks brings the currency toward its fundamental value and there is potential for further gains, Agung said. Inflation may be lower than 4 percent by the end of the year, he said.

“While it is too soon to do anything, the likelihood that the Federal Reserve is going to delay liftoff could provide an opportunity to deliver a rate cut to support growth," Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore, said before the decision. "They could start setting the stage for a cut as early as December.”

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