Bank Indonesia saves rate bullets as rupiah stabilises

Investors pumping RM5.8b into govt bonds in the 3Q help keep the rupiah fairly stable, restricting its fall for the year to about 11%


JAKARTA • Indonesia’s central bank left its benchmark interest rate unchanged yesterday, opting to save some of its policy ammunition after five hikes since May helped to stabilise the currency.

The seven-day reverse repurchase rate was held at 5.75%, in line with the forecasts of 21 of the 30 economists surveyed by Bloomberg. Senior deputy governor Mirza Adityaswara, who announced the decision at a briefing in Jakarta, said further action will depend on the outlook for the current- account deficit, inflation and the exchange rate.

Bank Indonesia’s 150 basis points (bps) of rate increases since mid-May and steps taken by the government to curb imports are starting to pay off: Investors pumped US$1.4 billion (RM5.82 billion) into government bonds in the third quarter (3Q) compared to US$2.3 billion of outflows in the previous three months.

That’s helped to keep the rupiah fairly stable since Oct 5, restricting its decline for the year to about 11% against the dollar amid a global emerging-market rout sparked by rising US interest rates.

With the US Federal Reserve (Fed) on track to tighten further and more market volatility still in store, Bank Indonesia isn’t out of the woods yet. Most economists surveyed by Bloomberg see Indonesia hiking rates into next year.

“We think that Bank Indonesia will maintain a tight monetary stance with the opportunity for another 25bps hike in November in anticipation of a Fed hike of 25bps at its December meeting,” said Josua Pardede, an economist with PT Bank Permata in Jakarta.

The Jakarta Composite Index fell as much as 0.7% after the rate decision in a range bound trade. The rupiah weakened 0.1% to 15,204 a dollar and the yield on the nation’s 10-year sovereign bonds was little changed at 8.6%.

For now, policymakers can hold off on raising rates given a benign inflation environment, weaker economic growth prospects and a surprise trade surplus in September. Consumer prices rose at their slowest pace in more than two years at 2.9% in September, well within the central bank’s target band of 2.5% to 4.5%.

Authorities have taken stronger steps to rein in a current-account deficit of 3% of GDP, one of the key risks to the currency. Adityaswara said the current account remains under pressure as import growth outpaced exports.

Adityaswara said volatility in the currency was under control, but the central bank would continue efforts to stabilise the exchange rate.

“This decision is consistent with efforts to lower the current-account deficit until it reaches the safe level and maintain the attractiveness of domestic financial markets in order to further strengthen Indonesia’s external resilience amid global uncertainties that are still high,” he said “Indonesia’s central bank lost out on an opportunity to get ahead of the rupiah. The rupiah remains vulnerable, with key ingredients for stability still elusive. What’s more, time is getting short for the central bank to nail down the currency before policy shifts might be seen as interfering with Indonesia’s election in April,” according to a Bloomberg economist.

Finance Minister Sri Mulyani Indrawati told lawmakers last week a weaker rupiah will weigh on the economy, which she said may expand 5.1% next year, compared to an initial forecast of 5.3%. The central bank said growth will be at the lower end of its 5% to 5.4% forecast range.