Photographer: Dimas Ardian/Bloomberg

Asia’s Biggest Rate Cutter May Be About to Hit Pause

  • Rupiah slumped last week after Trump’s shock election win
  • Central bank lowered rates six times this year to spur growth

Asia’s biggest interest-rate cutter may be about to hit the pause button, starting Thursday.

Bank Indonesia was happy to lower its benchmark rate six times this year to shore up economic growth amid subdued inflation and exchange-rate stability.

Then came Donald Trump. His surprise U.S. presidential election win has stoked investor bets on faster inflation and Federal Reserve interest-rate increases, boosting the dollar -- especially against emerging-market currencies like Indonesia’s rupiah. It’s all reminiscent of the taper tantrum in 2013 when the Fed’s signal of stimulus withdrawal prompted an Indonesian sell-off.

“The Fed complicates things and the turmoil that we’ve had since the Trump election I think makes it very difficult for the authorities to cut,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. “When everybody’s selling your currency, for a central bank, the thing to do is to send those calming signals. Changing policy in that environment is really not the way to do that.”

The central bank in Southeast Asia’s biggest economy is forecast to keep its benchmark seven-day reverse repurchase rate at 4.75 percent on Thursday, according to all but three of the 20 economists surveyed by Bloomberg.

Currency Slide

In a separate poll last week, when financial markets were hit by volatility, a majority of the 24 analysts predicted Indonesian policy makers will remain on hold until the end of 2017.

Indonesia’s rupiah has been among the hardest hit in Asia in the past week as investors dumped emerging-market assets, forcing policy makers to intervene to stabilize the currency and signal more action if needed. The rupiah dropped as much as 3 percent against the dollar to a five-month low of 13,545 on Nov. 11, its sharpest intraday decline since September 2013.

Juda Agung, executive director of monetary policy at Bank Indonesia, said that while the Indonesian economy remained in “pretty good” shape and growth in 2016 was still expected to be in the range of 5 percent, “the challenge ahead is not easy”. The U.S. election had delivered a president with a “more protectionist agenda,” he told reporters in Jakarta on Tuesday.

“The impact in the short term is that financial markets were somewhat shocked by the election of Donald Trump because it was not what was expected,” he said.

Until now, Bank Indonesia’s focus has been solidly on the economic growth outlook. It aggressively cut rates this year and in August adopted the seven-day reverse repurchase rate as its new benchmark in an effort to boost lending. The central bank’s growth forecast for this year is well below the 7 percent targeted by President Joko Widodo when he came to office two years ago.

“Growth has been quite slow, inflation is still around the lower end of the forecast range,’’ said Charu Chanana, an economist with Forecast Pte Ltd. in Singapore. “The global events right now are going to put them into a position to hold because Trump’s policies are very uncertain in terms of trade and foreign policy.”

With inflation subdued at 3.3 percent in October, close to the lower end of the bank’s 3 percent to 5 percent target, economists including Rahul Bajoria of Barclays Plc had seen room for a rate cut on Thursday.

“We changed our call just after the CPI numbers came out, before the election,” he said. “Now, since the election, has the risk of BI not moving in this meeting gone up? Absolutely.”

— With assistance by Thomas Kutty Abraham, Herdaru Purnomo, and Manish Modi

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