Indonesia Surprises by Holding Key Rate Amid Volatile Market

(Bloomberg) -- Indonesia’s central bank unexpectedly left its key interest rate unchanged for a second month to bolster the currency in the face of a flagging economy and volatile financial markets.

Bank Indonesia held its seven-day reverse repurchase rate steady at 4.5%, following rate cuts in February and March. Only six of 25 economists expected the bank to stay put Tuesday, with the rest predicting a 25 basis-point cut.

“This decision considers the need to maintain exchange rate stability amid the uncertainty of global financial markets, although Bank Indonesia sees room for lower interest rates as inflationary pressure is low and there is a need to encourage economic growth,” Governor Perry Warjiyo said in an online briefing.

The Covid-19 pandemic is taking a heavy toll on trade and consumer spending in Southeast Asia’s biggest economy, with the government slashing its growth projection for this year to 2.3% from an initial 5.3%. The government has taken unprecedented emergency fiscal measures, abandoning a budget deficit ceiling of 3% of gross domestic product as it accelerates spending to counter the pandemic. It now projects this year’s budget deficit at more than 6% of GDP.

“Given the weak first-quarter growth -- and likely even weaker momentum since then due to broader Covid-19 outbreak and impact -- the case for a cut to help growth has clearly risen of late,” said Wellian Wiranto, an economist at Oversea Chinese Banking Corp. in Singapore. “Hence, BI’s reluctance to ease is even more stark.”

Bank Indonesia’s extended pause underscores ongoing concerns about currency weakness and financial market stability, especially as the government prepares to borrow and spend more. Warjiyo said Tuesday the rupiah remains undervalued and the central bank would intervene in markets to support it. He also reiterated the bank’s commitment to buy government bonds to help finance the budget deficit.

The currency has fallen more than 6% against the dollar since the start of the year -- making it one of the worst performers in Asia -- although over the past month it has been the best. The rupiah held gains made earlier Tuesday and was up 0.5% at 14,770 per dollar as of 3:39 p.m. in Jakarta.

“The pressure on the rupiah has eased in the past couple of weeks, but it still remains one of the most volatile currencies among emerging markets,” said David Sumual, chief economist of PT Bank Central Asia in Jakarta.

Bank Indonesia may want to give earlier steps time to work their way through the economy, while monitoring oil prices and the country’s external balances, Sumual said. He added that the government’s announcement of a sharply higher budget deficit also likely influenced Tuesday’s decision.

“It must be in their calibration,” Sumual said.

Sluggish Economy

Bank Indonesia has lowered its benchmark rate by a total of 150 basis points since last year to support an economy that was slowing even before the virus outbreak. On Tuesday the bank maintained its inflation forecast of 2%-4% for this year, saying that level left it space to cut rates further. It also warned the second quarter would be the most difficult, and full-year GDP could turn out even weaker than anticipated before accelerating next year.

Tuesday’s decision suggests the central bank will take a cautious approach to further easing, according to Wisnu Wardana, an economist at PT Bank Danamon Indonesia. Indonesia’s inflation-adjusted interest rate is in-line with emerging-market peers, he said.

Warjiyo said the current-account deficit, one of Indonesia’s chronic vulnerabilities, would come in below 1.5% for the first quarter of 2020 and below 2% for the full year. However, this was due mostly to a sharp fall in imports, emphasizing the weakness of domestic demand.

Warjiyo also stressed the bank’s willingness to provide further liquidity, including targeted support for small- and medium-sized enterprises. Bank Indonesia said banks can utilize government bonds for repo transactions.

©2020 Bloomberg L.P.