Bank Indonesia Saves Rate Bullets for Future Fed Tightening

(Bloomberg) -- Indonesia’s central bank left its benchmark interest rate unchanged on Tuesday, opting to save some of its policy ammunition for possible further market volatility triggered by higher U.S. rates.

The seven-day reverse repurchase rate was held at 5.75 percent, in line with the forecasts of 21 of the 30 economists surveyed by Bloomberg. Senior Deputy Governor Mirza Adityaswara, who announced the decision at a briefing in Jakarta, said further action will depend on the outlook for the current-account deficit, inflation and the exchange rate.

Bank Indonesia’s 150 basis points of rate increases since mid-May and steps taken by the government to curb imports are starting to pay off: investors pumped $1.4 billion into government bonds in the third quarter compared with $2.3 billion of outflows in the previous three months.

While that’s helped to slow the rupiah’s slide -- it’s been fairly stable since Oct. 5 -- Bank Indonesia isn’t out of the woods yet. The U.S. Federal Reserve is on track to tighten policy further, while global trade tensions continue to mount, threatening to extend the rout in emerging markets.

Bank Indonesia Saves Rate Bullets for Future Fed Tightening

“Our base case remains a gradual increase of the policy rate going forward as the economy is expanding below potential and Bank Indonesia may want to maintain an attractive interest rate differential compared to peers amid a rising Fed fund rate,” said Aldian Taloputra, a Jakarta-based economist at Standard Chartered Plc.

Most economists surveyed by Bloomberg see Indonesia hiking rates into next year as policy makers keep their focus on the currency. The rupiah has dropped about 11 percent against the dollar this year, among the worst performers in Asia.

“We think that BI will maintain a tight monetary stance with the opportunity for another 25 basis points hike in November in anticipation of a Fed hike of 25 basis points at its December meeting,” said Josua Pardede, an economist with PT Bank Permata in Jakarta.

The Jakarta Composite Index fell 0.7 percent at the close on Tuesday. The rupiah was little changed and traded at 15,192 against the dollar, while the yield on the nation’s 10-year sovereign bonds was little changed at 8.6 percent.

Current Account

For now, policy makers can hold off on raising rates given a benign inflation environment, weaker economic growth prospects and a surprise trade surplus in September. Consumer prices rose at their slowest pace in more than two years at 2.9 percent in September, well within the central bank’s target band of 2.5 percent to 4.5 percent.

Authorities have taken stronger steps to rein in a current-account deficit of 3 percent of GDP, one of the key risks to the currency. Adityaswara said the current account remains under pressure as import growth outpaced exports.

Adityaswara said volatility in the currency was under control, but the central bank would continue efforts to stabilize the exchange rate.

“This decision is consistent with efforts to lower the current-account deficit until it reaches the safe level and maintain the attractiveness of domestic financial markets in order to further strengthen Indonesia’s external resilience amid global uncertainties that are still high,” he said

What Our Economists Say...

Indonesia’s central bank lost out on an opportunity to get ahead of the rupiah. The rupiah remains vulnerable, with key ingredients for stability still elusive. What’s more, time is getting short for the central bank to nail down the currency before policy shifts might be seen as interfering with Indonesia’s election in April.

-- Tamara Henderson, Bloomberg Economics

Finance Minister Sri Mulyani Indrawati told lawmakers last week a weaker rupiah will weigh on the economy, which she said may expand 5.1 percent next year, compared with an initial forecast of 5.3 percent. The central bank said growth this year will be at the lower end of its 5 percent to 5.4 percent forecast range.

©2018 Bloomberg L.P.