Bank Indonesia Stays on Hold, Says Rate Moves Still a Year Away

(Bloomberg) -- Indonesia’s central bank left its benchmark interest rate unchanged and extended policies to boost domestic demand, saying it likely won’t tinker with rates for another year. 

Bank Indonesia kept the seven-day reverse repurchase rate at a record-low 3.5% on Tuesday, as predicted by all 30 analysts in a Bloomberg survey. It was the bank’s eighth straight hold decision.

“This year’s interest rates will remain low and liquidity remains loose. Next year the interest rate for most of the year will also remain low, and we will begin reducing liquidity just little by little,” Governor Perry Warjiyo said at a briefing in Jakarta. “It’s likely that in the fourth quarter of 2022, we will think about interest rates.”

Southeast Asia’s biggest economy is seeing early signs of recovery from the ravages of coronavirus delta-variant, with rebounds seen in manufacturing and consumer confidence. Indonesia also has reopened its borders to revive tourism, allowing vaccinated foreign visitors to some destinations including Bali.

Warjiyo announced that the central bank was easing down-payment rules for home and auto loans until the end of 2022 and extending a stimulus program for credit-card repayments, steps designed to augment the effects of its accommodative monetary policy. 

“Overall, next year most of our instruments will still be directed to support growth,” the governor said, even as inflation drives some central banks globally to begin tightening policy.

The rupiah strengthened 0.2% Tuesday to 14,076 to the U.S. dollar. Indonesia’s benchmark stock index recouped earlier losses after the decision and was almost flat on the day.

What Bloomberg Economics Says...

“Steady rates may be the optimal choice as the central bank will have to continue to navigate between competing concerns -- sub-par domestic demand, rupiah vulnerability and building price pressures. By the second half of 2022, the pressure to lift the policy rate is likely to be acute, in our view, especially if the Federal Reserve unexpectedly brings forward the start of its rate hikes.”

Tamara Mast Henderson, Asean economist

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Bank Indonesia “signaled its intention to not be swept along by the recent hawkish tilt of more and more central bank peers, and to continue its holding stance for a while more,” said Wellian Wiranto, economist at Oversea-Chinese Banking Corp in Singapore. “Looking into next year, we see BI continuing to have the space to keep its policy rate unchanged in the first half, but the risk of a stronger drumbeat for a Fed funds rate hike in the second half might get harder for it to dismiss.”

Currency Concerns

Soaring commodity prices are helping Indonesia, a top exporter of coal and palm oil. A narrower-than-expected current-account deficit and high foreign reserves should support the rupiah, which has become Asia’s best performing currency in the second half of the year, gaining 3%. 

“It’s hard to stress how perfectly the stars have aligned for Bank Indonesia. The energy-price crunch and commodity boom is a blessing for Indonesia,” said Joseph Incalcaterra, Asean economist at HSBC Holdings Plc in Hong Kong. “This provides BI with unprecedented flexibility to avoid premature tightening.”

Still, the rupiah could face headwinds as the U.S. Federal Reserve gets closer to tapering its pandemic-era asset purchases. Foreign funds sold $1.3 billion of Indonesian sovereign bonds last month, the most since March 2020, though the central bank said earlier this month the selling pressure was temporary.

Other points from the briefing:

• The central bank maintained its forecast for the economy to grow 3.5%-4.3% this year
• This year’s average inflation expected to be below midpoint of 2%-4% target range
• Core inflation is still low, in line with weak domestic demand
• Indicators such as manufacturing PMI, retail sales, consumer confidence and payment transactions show economy gaining steam
• Current-account surplus expected for the third quarter
• The current-account is expected to show a deficit of 0%-0.8% of GDP for the full year -- narrower than the 0.6%-1.4% deficit previously forecast -- and show a small deficit in 2022 as well
• Demand for business and consumer loans is improving, with loan growth expected to reach 4%-6% this year

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