Indonesia Keeps Key Rate Unchanged as Rupiah Slumps on Fed

  • Decision was forecast by all but one of 21 economists surveyed
  • Currency among worst hit in Asia after Fed signaled more hikes

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Indonesia’s central bank kept its benchmark interest rate unchanged for a second month as more policy tightening in the U.S. added to the risk of capital outflows from emerging markets.

Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.75 percent, in line with the forecasts of all but one of 21 economists surveyed by Bloomberg.

The rupiah slumped as much as 0.8 percent on Thursday, among the worst hit Asian currencies, after the Federal Reserve signaled it may raise interest rates three more times next year. Market volatility had already heightened since Donald Trump’s unexpected victory in the U.S. election in November, giving policy makers in Indonesia reason to pause after six rate cuts this year.

“This decision to hold is consistent with the expectations of inflation for next year and the need to maintain the stability of the rupiah in the near term,” said Josua Pardede, an economist at PT Bank Permata in Jakarta.

Bank Indonesia had been Asia’s biggest rate cutter this year, easing policy to help spur economic growth. Inflation, which accelerated to 3.6 percent in November from 3.3 percent the previous month, is still well within the bank’s 3 percent to 5 percent target.

While the rupiah recovered after a selloff sparked by Trump’s win, policy makers may be wary of undermining sentiment toward the currency. The rupiah has dropped 1.7 percent against the dollar in three months and closed at 13,398 on Thursday.

Bank Indonesia may be done easing policy, with Capital Economics Ltd. predicting it will remain on hold through 2017, compared with a previous forecast of one more reduction next year. “The threat of further interest-rate rises in the U.S. means that BI is likely to tread extremely carefully,” said Oliver Jones, an economist at Capital Economics in London.

The central bank said earlier easing was supportive of economic growth, which it estimates will reach 5 percent to 5.4 percent next year, compared with about 5 percent in 2016.

Rising commodity prices may help to support exports this quarter, Juda Agung, executive director for monetary policy at Bank Indonesia, told reporters in Jakarta. The monetary authority would seek to balance stability with economic recovery, he said when asked about the central bank’s policy stance. Average lending rates had fallen 67 basis points this year and transmission of previous easing was still ongoing, said Agung.

— With assistance by Manish Modi, Eko Listiyorini, and Yudith Ho

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