Bank Indonesia Holds Benchmark Rate After Two Surprise Cuts

Updated on
  • Central bank on guard against further weakness in currency
  • All 25 economists in survey correctly predicted the decision

Indonesia’s central bank kept its benchmark interest rate unchanged as expected, pausing after two cuts in a row, as policy makers turn their attention to risks of a weaker currency.

Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.25 percent on Thursday, as forecast by all 25 economists surveyed by Bloomberg. The bank has already cut rates eight times since the beginning of last year, including in August and September, to help boost growth in Southeast Asia’s biggest economy.

Despite subdued inflation of 3.7 percent in September -- within the target range of 3 percent to 5 percent -- the central bank is on guard for more currency weakness that could come about from U.S. tax reforms and interest rate increases. The rupiah has dropped 1.2 percent against the dollar since the August rate cut after having been relatively stable for most of this year.

The recent easing is seen as sufficient to support economic growth while inflation would remain manageable, Bank Indonesia’s Assistant Governor Dody Budi Waluyo told reporters on Thursday. The currency faces significant risks from U.S. tax reforms and geopolitical ructions stemming from hostilities on the Korean Peninsula, he said.

Here are the key points from Bank Indonesia’s monetary policy statement:

  • Central bank maintains growth estimate of 5 percent to 5.4 percent for 2017
  • Inflation may stay below 4 percent for the remainder of 2017
  • Higher economic growth is seen coming from improving consumption and retails sales
  • Exports are seen picking up, supported by mining and plantation products

Indonesia’s economy has been growing at about 5 percent, well short of the 7 percent target set by President Joko Widodo, known as Jokowi, when he came to power three years ago. He said in an interview that he would “be happy if lending rates fall,” although he acknowledged the decision rests with the central bank.

“The statement that the back-to-back rate cuts are sufficient plus the assessment that growth is now going to improve for the rest of the year reinforces our view that Bank Indonesia is done cutting its policy rates even if inflation remains within target,” said Euben Paracuelles, a senior economist for Southeast Asia at Nomura Holdings Inc. in Singapore.

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— With assistance by Manish Modi, Yudith Ho, Harry Suhartono, and Rieka Rahadiana

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