Indonesia Holds Interest Rate as It Shifts Focus to Growth

(Bloomberg) -- Indonesia’s central bank left its benchmark interest rate unchanged for a fourth month as the U.S. Federal Reserve’s shift to a prolonged pause gives policy makers in Southeast Asia’s biggest economy room to support growth.

The seven-day reverse repurchase rate was left at 6 percent on Thursday, as predicted by all 36 economists surveyed by Bloomberg. Governor Perry Warjiyo and his board raised the rate by a total of 175 basis points last year to head off a market rout in developing economies and a slump in the currency, triggered by tighter U.S. monetary policy.

“The decision is consistent with efforts to strengthen external stability, especially to control the current account deficit and maintain the attractiveness of domestic financial assets,” Warjiyo told reporters in Jakarta.

Key Insights

• The Fed has turned more dovish after last year’s tightening spree, allowing Asian central banks to hold off on more rate hikes, and possibly scope to ease policy. In the past week, both Goldman Sachs Group Inc. and Morgan Stanley have predicted rate cuts in Indonesia this year
• Bank Indonesia remains cautious though, given concerns about the current-account deficit and the economy’s vulnerability to currency swings. The deficit -- which reached a four-year high of 3 percent of gross domestic product last year -- was a key reason why Indonesia took a bigger knock in the emerging-market rout than some of its peers. The rupiah has gained 1.9 percent against the dollar so far this year after dropping 5.7 percent in 2018
• Warjiyo said the central bank would apply “accommodative macroprudential” policies to push domestic demand, and announced an increase in the loan-to-funding ratio to help banks spur lending to businesses. While the stance on the policy rate is “aimed at external stability,” the bank is “still pushing for economic growth,” Warjiyo said
• Low inflation means policy makers can stay on hold for longer. Consumer-price growth eased to 2.57 percent in February, the slowest pace since November 2009, and close to the lower end of the central bank’s 2.5 percent to 4.5 percent target band

Economists’ Views

• “It sounds like BI remains cautious regarding the risk of cutting the policy rate too early,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. He sees policy on hold through 2019 and 100 basis points of cuts in 2020, but the risk of an earlier move, toward late 2019, is possible given the Fed’s more dovish signals, he said

What Bloomberg’s Economists Say

“Bank Indonesia is working to support domestic demand. It’s also aiming to protect the progress it expects this year in narrowing the current account deficit in support of the rupiah. This is a prudent stance, and one that suggests the policy rate won’t be lowered anytime soon.”
-- Tamara Henderson, economist for Southeast Asia, Australia and New Zealand
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• Indonesia holds a presidential election on April 17, with economic policy changes emerging as a key campaign issue. President Joko Widodo is favored to win a second term in a contest that pits him against former general Prabowo Subianto, who he defeated in 2014

--With assistance from Manish Modi, Rieka Rahadiana and Eko Listiyorini.

To contact the reporters on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net;Viriya Singgih in Jakarta at vsinggih@bloomberg.net;Arys Aditya in Jakarta at aaditya5@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net;Thomas Kutty Abraham at tabraham4@bloomberg.net

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