Indonesia decision guide: Time for pause after three rate hikes

After three interest-rate hikes to curb a currency rout, Indonesia’s central bank may be ready to pull the handbrake on Thursday as the pace of the rupiah’s slide slows.

Of the 28 economists surveyed by Bloomberg, 25 predict Governor Perry Warjiyo and his board will keep the seven-day reverse repurchase rate unchanged at 5.25 percent. The rest expect a hike of 25 basis points.

Bank Indonesia raised its benchmark rate three times by a total of 100 basis points in the past two months to stabilize the currency amid an emerging-market sell-off triggered by higher U.S. interest rates. There are early signs of a recovery, with inflows of $374.5 million into the bond market this month, enabling policy makers to pause for now.

“It’s still a close call but I think Bank Indonesia is running into some policy limits so it might be trying to conserve some bullets for now,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. Here’s what to watch for in the statement:

Rupiah rout

The currency dropped 2.4 percent against the dollar between the first rate hike on May 17 and the third one on June 29, but has been stable since then, providing some comfort to policy makers.

Senior Deputy Governor Mirza Adityaswara said while trade tensions between the U.S. and China and a signal from the Federal Reserve that it would raise rates four times in 2018 had caused volatility in the market, there are now signs of an “adjustment.” He told reporters on Tuesday that a return of inflows into government bonds indicated investors are comfortable with the yield and the value of the rupiah.

“When they decide to come in at the current level, it means they expect that the rupiah will be stable or even stronger in the future,” he said. “The stability is already there and, hopefully, we can maintain it until the end of the year.”

Inflation policy

The inflation outlook remains benign for now, with consumer-price growth easing to 3.1 percent in June, well within the central bank’s 2.5 percent to 4.5 percent target band. That’s partly because of government steps to curb costs, including price controls on fuel.

A growing worry is food prices, which climbed 4.7 percent in June from a year ago.

Growth outlook

Economic growth and jobs are other key considerations for President Joko Widodo as election campaigning kicks off later this year. With the economy expanding at about 5 percent – compared with the 7 percent targeted by Widodo almost four years ago – Bank Indonesia’s Warjiyo has been taking steps to support growth, including macro-prudential measures aimed at boosting the housing sector.

“We have said this over and over again: When we determine the interest rate policy, we always take into account all indicators,” like inflation, growth, the current-account deficit as well as projections for U.S. rates, Warjiyo told reporters on July 13.

“How about the future? I will repeat it once again: Bank Indonesia will keep calibrating various domestic and foreign indicators in order to optimize future policy mix,” he said. “Of course it will be data dependent.”

Recent comments by policy makers:

July 13: Governor Perry Warjiyo

  • “We are confident that we will be able to maintain stability and push for more economic activity”
  • “We have one bitter herbal drink to stabilize the exchange rate and four sweet herbal drinks to boost the economy,” he said, referring to interest rates and the use of macro-prudential measures

July 17: Senior Deputy Governor Mirza Adityaswara:

  • “The most important thing is the rupiah has to be stable. If the rupiah exchange rate is stable, businesses in the real sector can formulate their budget plans for 2019. They can go on with their expansion plans”
  • “We’ll be data dependent. We’ll take into account the U.S. policy and data, we’ll look at the U.S. financial markets and the policies of our neighboring countries”
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