Bank Indonesia Pauses Rate Hikes as Fed Turns Cautious

(Bloomberg) -- Indonesia’s central bank left its benchmark interest rate unchanged after six hikes since May and a more cautious Federal Reserve helped to stem a rout in the currency.

The seven-day reverse repurchase rate was left at 6 percent on Thursday, in line with almost all of the 26 economists surveyed by Bloomberg. The central bank, which has followed the Fed in tightening policy this year, said it sees a slower pace of U.S. rate hikes next year and expects the current-account deficit to ease.

Bank Indonesia Pauses Rate Hikes as Fed Turns Cautious

“Bank Indonesia believes that the current interest rate level is still consistent with efforts to lower the current-account deficit to reach the safe level and to maintain the attractiveness of domestic financial assets, including by taking into account the trend of global interest rate movement in the coming months,” Governor Perry Warjiyo told reporters in Jakarta.

Key Details

  • Bank Indonesia has been one of the more aggressive central banks in Asia this year, surprising economists with a 25 basis-point hike last month
  • Warjiyo said the bank took investor confidence and the Fed policy action into account, adding it expects two rate hikes in the U.S. next year. It also cited slowing growth in Europe and China
  • The domestic economy is forecast to expand 5 percent to 5.4 percent in 2019, while inflation is seen within the central bank’s target range of 2.5 percent to 4.5 percent
  • Consumer prices remain subdued, rising 3.2 percent in November from a year ago. The central bank sees inflation averaging 3.2 percent this year
  • The rupiah has gained almost 3 percent against the dollar this quarter as foreign investors pumped more than $2.5 billion into government bonds since the beginning of October

Economists’ Views

  • “The decision was in line with our expectations, mainly on the back of a less aggressive Fed, but Bank Indonesia will continue to be vigilant towards external risks,” said Enrico Tanuwidjaja, the head of economics and research for PT UOB Indonesia in Jakarta
  • “We think the central bank is starting to consider impacts of a global economic slowdown that will naturally close the imbalance in domestic and external demand,” said Wisnu Wardana, a Jakarta-based economist at PT Bank Danamon Indonesia

What Our Economists Say... 

Bank Indonesia sounds comfortable that it has done enough with interest rate adjustments. It indicated that the current level is sufficient to maintain the yield appeal of Indonesian government bonds – even factoring in another 50 bps of rate hikes by the Federal Reserve next year. In our reading of the tea leaves, this doesn’t mean more hikes are out of the question, only that the central bank will now lean more heavily on direct intervention in the currency market to stabilize the rupiah.
-- Tamara Henderson, Bloomberg Economics

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  • The current-account deficit remains a worry for policy makers after it ballooned to 3.4 percent of gross domestic product in the third quarter. The central bank sees the deficit coming down to 2.5 percent of GDP in 2019 from 3 percent this year

©2018 Bloomberg L.P.

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