Indonesia bucks tightening trend as rate held at record low

INDONESIA’S central bank kept its benchmark rate unchanged to foster economic growth, as it sits out the global shift toward fighting inflation with tighter monetary policies.

Bank Indonesia (BI) left the seven-day reverse repurchase rate at a record low 3.5% on Thursday, as predicted by 22 of 36 economists in a Bloomberg survey. The rest expected policymakers to deliver a 25 basis-point hike.

The rupiah held on to earlier losses to trade 0.2% weaker at 15,022 per dollar as of 2:27pm in Jakarta. The country’s benchmark stock index was down 0.6%.

By opting to buck the US Federal Reserve-led policy tightening rush, BI is showing that not all need to take the same approach to fighting inflation. South-East Asia’s biggest economy, which is also the world’s largest palm oil exporter, has the fiscal room to cope with supply-driven price pressures, thanks to a windfall from commodity exports, and a relatively resilient currency.

The rupiah has been among the least volatile in the region, despite touching about 15,000 against the dollar, the weakest level since 2020. While headline inflation has breached the central bank’s 2%-4% target range, Governor Perry Warjiyo said Thursday price gains remain manageable, with the core measure tracked by BI still muted at 2.6%.

Warjiyo said headline inflation will exceed the bank’s target this year and return within range in 2023. The central bank sees the economy expanding more toward the lower end of a 4.5%-5.3% outlook range, as it flagged risks to global growth.

“We were actually harboring the hope that some tightening might come into place by now,” said Wellian Wiranto, economist at Oversea-Chinese Banking Corp in Singapore, who expects 75 basis points of hikes from BI this year. “We still see a good chance of the rate hike to come next month, with inflation likely to pick up once again on food and fuel price upticks.”

BI has been using tools other than interest rates to normalize monetary policy settings. The governor reiterated raising the reserve requirement ratio gradually to absorb excess liquidity, with 219 trillion rupiah ($14.6 billion) absorbed so far. The bank has planned more government bond sales to mop up excessive money from the financial system. — Bloomberg

Here are some more comments from Governor Warjiyo:

The central bank will strengthen market operations by selling off more government bonds and increasing money market interest rates

2022 current account forecast revised to a range from a surplus of 0.3% of GDP to a deficit of 0.5% of GDP. The previous estimate was for a deficit of 0.5%-1.3% of GDP this year

BI will stabilise rupiah via intervention in spot and forward markets.