Indonesia Has Had Enough Rate Cuts, Says Central Bank Deputy

  • Central bank eased policy six times last year to spur growth
  • Keeping inflation under 4% may be difficult, Adityaswara says

A senior deputy governor at Indonesia’s central bank gave his clearest signal yet that policy makers are done cutting interest rates to spur the economy, saying the benchmark rate is “low enough.”

Boosting growth is “not about interest rates anymore,” Mirza Adityaswara, who is in charge of monetary policy, foreign-exchange reserves and currency management at Bank Indonesia, said in an interview in Jakarta on Thursday. “We monitor the external factors,” he said. “We think we’ve already cut enough.”

Bank Indonesia was Asia’s biggest rate cutter in 2016 after six reductions to spur growth in Southeast Asia’s biggest economy. Since then, a weaker currency -- fueled by expectations of higher U.S. interest rates -- and a pick-up in price pressures have put policy makers on hold. The central bank in February kept its benchmark rate unchanged at 4.75 percent, which Adityaswara said was “low enough.”

“The current interest-rate level is sufficient to support growth,” he said. “So it’s not about interest rates anymore. It’s more about how the demand side picks up and that depends a lot on business confidence” and the improvement in commodity prices, he said.

Indonesia’s economy grew 5 percent last year and is forecast by the World Bank to pick up pace this year to 5.3 percent. After dropping below 3 percent last year, inflation is starting to accelerate, reaching 3.8 percent in February.

“It’s the strongest commentary” the bank has given recently on the interest-rate outlook, said Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “Even though inflation control will be more challenging in 2017, we think a neutral policy stance is still warranted and that’s what BI communicated.”

The yield on Indonesia’s 10-year government bonds rose 3 basis points to 7.53 percent by 10 a.m. on Friday in Jakarta, after gaining the most in almost three months on Thursday. The rupiah fell for a third day to 13,395 against the dollar, the weakest level since Jan. 20.

Keeping inflation under 4 percent this year may be “a bit difficult,” Adityaswara, 51, said, adding that the central bank still thinks it can maintain it at about that level. The bank’s target range is 3 percent to 5 percent.

Central banks across Southeast Asia are turning more cautious after years of policy easing. Consumer prices in Malaysia rose at the fastest pace in almost a year in January, closing the door on further interest-rate cuts even though the economy could do with more stimulus. From Singapore to Thailand, inflation is picking up.

Fed Risk

Adityaswara said the bank was also guarding against any market fallout if the U.S. raises interest rates again. Speculation of tightening by the Federal Reserve has fueled capital outflows in emerging markets, including in Indonesia, where the currency has dropped 2.2 percent against the dollar in the past six months.

The Federal Reserve is set to tighten policy next week, hours before Bank Indonesia makes its own rate decision on March 16.

Adityaswara said any change to the policy course in Indonesia in the first half of the year will depend on inflation outcomes, market reaction linked to the Fed, and the current-account deficit, which he said may widen to 2 percent to 2.5 percent of gross domestic product in 2017. The bank is ready to protect the rupiah in the event of market volatility, he added.

“Our mandate is to maintain stability of the rupiah, the value of the rupiah,” which means “we have to be able to control inflation,” he said. The level of the currency was “competitive enough” to support the nation’s manufacturing industry, he said.

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