Bank Indonesia Vows to Remain Vigilant as It Leaves Rate on Hold

(Bloomberg) -- Indonesia’s central bank left its benchmark interest rate unchanged for a second month, while keeping the door open for more policy action if needed.

After hiking by 175 basis points since May, Bank Indonesia kept its seven-day reverse repurchase rate at 6 percent on Thursday, as predicted by all 26 economists surveyed by Bloomberg. Governor Perry Warjiyo said the rate was near its peak, but the policy stance is still “hawkish” and policy makers will remain “pre-emptive and forward-looking.”

Bank Indonesia Vows to Remain Vigilant as It Leaves Rate on Hold

“This decision is consistent with efforts to lower the current-account deficit until it reaches the safe level and to maintain the attractiveness of domestic financial assets,” Warjiyo said at a briefing in Jakarta.

Key Insights

  • Bank Indonesia was one of the most aggressive central banks in Asia last year, tightening policy in the face of an emerging-market sell-off triggered by rising U.S. interest rates. A more cautious Federal Reserve and the BI’s proactive policy action have helped the rupiah rebound almost 7 percent against the dollar in the past three months
  • The central bank will remain vigilant and take steps to guard the currency, Warjiyo said. Officials took the faltering global economy and the outlook for the Fed policy action into account, and expects two rate hikes in the U.S. this year
  • The trade and current-account shortfalls remain a concern. The nation posted its worst-ever trade deficit last year, while the current-account shortfall ballooned to 3.4 percent of gross domestic product in the third quarter of 2018

Economists’ Views

  • “Cuts are coming, but looks like a prolonged pause for now,” said Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch in Singapore. He said the second half of 2019 is “still the most likely” time frame for policy easing
  • “They are unlikely to ease policy in the medium term given that the trade and current account deficit will remain high this year,” said David Sumual, chief economist of PT Bank Central Asia in Jakarta

What Our Economists Say... 

Key vulnerabilities for the rupiah are receding. The central bank has a credible, pro-active hawkish stance. Risk appetite, though still fragile, is showing signs of stabilization with the Federal Reserve sounding willing to tread more carefully. The current-account deficit appears set to narrow. What remains is the uncertainty associated with elections and a permanent easing of trade tensions between the U.S. and China. Depending how these remaining issues play out, the rate cycle may have already peaked.

-- Tamara Henderson, Bloomberg Economics

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  • Warjiyo had been signaling the central bank may be close to the end of its policy tightening cycle, telling lawmakers on Wednesday the benchmark rate was near its peak
  • The central bank said the economy will probably expand 5 percent to 5.4 percent this year. The government has warned of risks to its 5.3 percent growth target for 2019 amid a global slowdown
  • Inflation, which is subdued at 3.1 percent, is forecast to remain within the central bank’s 2.5 percent to 4.5 percent target band this year
  • The rupiah weakened after the decision, and was down 0.5 percent to 14,200 per dollar as of 3:20 p.m. in Jakarta. The Jakarta Composite Index was up 0.2 percent after earlier gaining as much as 0.7 percent
  • The nation will hold elections in April and President Joko Widodo currently holds a big lead over his challenger Prabowo Subianto

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