Indonesia Keeps Benchmark Rate Unchanged Amid Currency SlumpBy and
All but three of 21 economists predicted rate to stay on hold
Central bank has cut rates six times this year to fuel growth
Indonesia’s central bank kept its benchmark interest rate unchanged after six cuts this year, seeking to calm financial markets in the wake of Donald Trump’s upset victory in the U.S. presidential election.
Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.75 percent on Thursday, in line with the forecasts of all but three of 21 economists surveyed by Bloomberg.
Bank Indonesia had reason to pause after taking aggressive action this year to boost growth amid a benign inflation environment. Heightened market volatility and expectations of more U.S. interest rate increases caused the rupiah to plunge as much as 3.7 percent against the dollar last week, prompting the central bank to intervene to stabilize the currency.
“The global uncertainty has become a bit of a factor and in addition to that I think inflation becomes a bit more of a constraint because we think it’s going to start to accelerate in the next six months,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. The central bank “is a little more cautious at this stage.”
The central bank is forecasting growth of about 5 percent for this year and 5 percent to 5.4 percent in 2017, well below the 7 percent targeted by President Joko Widodo when he came to office two years ago. Inflation is seen at 3 percent to 3.2 percent at the end of the year, inside the bank’s 3 percent to 5 percent target.
Indonesia’s Coordinating Minister for Economic Affairs Darmin Nasution said in comments cited by Detik website ahead of the decision that further rate cuts would depend on “whether or not we can manage inflation”.
Martowardojo said global factors had a major role to play in the bank’s decision and it will continue to guard the currency against volatility. Going forward, the bank will coordinate with the government to ensure there’s enough liquidity in the market, he said.
“This policy is in line with Bank Indonesia’s prudence in responding to the rising uncertainty in global markets after U.S. presidential elections,” he said. “We are responding to external uncertainty amid a stable domestic situation.”
The surprise win by Trump 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.
“With the U.S. set to start hiking interest rates soon, we think BI’s easing cycle is nearing an end,” said Oliver Jones, an economist at Capital Economics in London. With the risk of more aggressive Fed rate increases, “in this environment, BI would be unlikely to risk loosening policy,” he said.
— With assistance by Manish Modi