Indonesia keeps key rate unchanged as risks mount

By BLOOMBERG

JAKARTA • Indonesia’s central bank left its benchmark interest rate unchanged yesterday, as the currency comes under renewed pressure from an escalation in trade tensions between the US and China.

The seven-day reverse repurchase rate was left at 6%, as predicted by all but one of 30 economists surveyed by Bloomberg.

Bank Indonesia (BI) governor Perry Warjiyo and his board raised the rate by a total of 175 basis points last year, and have resisted following central banks in the Philippines, Malaysia, India and New Zealand in easing policy this year, given the market uncertainty.

Warjiyo said policymakers will monitor global risks and the stability of the economy “in considering the room for an accommodative monetary policy in line with low inflation and the need to push domestic economic growth”.

Indonesia officials are worried about potential spillovers from the US-China trade war.

The rupiah has already taken a knock from the worsening global outlook, with the currency down more than 2.6% against the dollar in the past month.

Weaker global demand and an escalation in trade tensions are key challenges for the economy, which the central bank expects will grow at below the midpoint of its 5% to 5.4% forecast range for this year.

“This is a credible response by BI, signalling it maintains top priority for its stability objective amid negative surprises on the trade deficit and importantly, the return of external risk from rising trade tensions,” said Euben Paracuelles, an economist at Nomura Holdings Inc in Singapore.

“They should be cautious on the risk of cutting the policy rate too early, given external risks.”

The rupiah closed stronger at 14,452 against the dollar yesterday after earlier falling to its lowest level since the beginning of January.

“BI is looking for an opportunity to cut interest rates, but acknowledged that the current external climate makes that tough to do.

“Barring a significant de-escalation in US-China trade tensions or rate cuts by the US Federal Reserve, we expect the central bank to maintain in 2019 its dual stance — shoring up the currency with an elevated policy rate while supporting credit growth with other tools,” said Tamara Henderson, Asean economist at Bloomberg.

The central bank yesterday revised its projection for the current-account deficit, and now sees it in a range of 2.5% to 3% of GDP in 2019 compared to an initial forecast of 2.5%.

The government has struggled to rein in the current-account deficit, which is seen as a key vulnerability for South-East Asia’s biggest economy.

The shortfall was 2.6% of GDP in the first quarter, and is under pressure after Indonesia posted its biggest trade gap in more than a decade in April.

Inflation remains subdued, and although it quickened in April to 2.8%, it remains well within the central bank’s target band of 2.5% to 4.5%.

The central bank sees inflation at below the midpoint of that range this year. — Bloomberg