Bank Indonesia Curbs Hawkish Rhetoric as Focus Stays on Rupiah

(Bloomberg) -- Indonesia’s central bank left its benchmark interest rate unchanged on Thursday, dropping some of its more hawkish comments of the past as the Federal Reserve’s policy pause helped to ease pressure on emerging markets.

The seven-day reverse repurchase rate was left at 6 percent for a third month, as predicted by all 33 economists surveyed by Bloomberg. Bank Indonesia hiked six times last year by a total 175 basis points.

Governor Perry Warjiyo didn’t reiterate past comments to keep a “hawkish” stance and remain “pre-emptive” on policy, saying instead that interest rates are focused on maintaining “external stability.”

“This decision is consistent with efforts to strengthen external stability, especially to control the current-account deficit to be in a safe level and maintain the attractiveness of domestic financial assets,” Warjiyo said.

Key Insights:

• The central bank took an aggressive approach last year to the sell-off in the currency, tightening policy to stabilize the rupiah, despite a subdued inflation environment
• With the Fed taking a more "patient" approach to future policy tightening, emerging markets, including Indonesia, are getting a breather. Warjiyo pared back expectations for Fed rate hikes to one this year
• The rupiah has gained about 2 percent against the dollar so far this year, giving policy makers room to hold. Warjiyo said the currency remains undervalued and will probably strengthen further
• Inflation in Southeast Asia’s biggest economy remains benign at 2.8 percent, well within the central bank’s 2.5 percent to 4.5 percent target band
• The current account deficit is still a key problem and one of the reasons policy makers are remaining cautious. The central bank said it will coordinate its policies with the government to control the deficit at 2.5 percent of gross domestic product this year

Economists’ Views

• “They want to make sure that the current account deficit target of 2.5 percent of GDP is achieved this year,” said David Sumual, chief economist of PT Bank Central Asia in Jakarta. “At this stage there are no cuts on the horizon unless economic growth drops dramatically below 4.9 percent or the current account deficit improves way below 2.5 percent of GDP in the first semester”
• Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch in Singapore, said rupiah stability was the main reason behind the decision to leave the rate unchanged. It’s clear the central bank is adopting a less hawkish tone and “there’s no need to be, given the change in Fed communication,” he said. There’s risk of Indonesia cutting interest rates, but more likely in second half of the year, he added

Get More

• Economic policy is becoming a key focus area of the April presidential election, which pits incumbent Joko Widodo against long-time rival Prabowo Subianto. Read more about where the candidates stand on policy: The Policies That Will Decide Who Wins Indonesia’s Election
• For a history of Indonesia’s policy decisions, click here: Indonesia Keeps 7-Day Rate Unchanged at 6%; Decision History

--With assistance from Rieka Rahadiana, Manish Modi, Yoga Rusmana 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;Tassia Sipahutar in Jakarta at ssipahutar@bloomberg.net

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

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