BI holds key interest rate amid new risks to rupiah

BANK Indonesia (BI) held its benchmark interest rate for a fifth straight month to head off pressure on the rupiah amid the Federal Reserve’s (Fed) hawkish overtures and a disappointing recovery in China. 

The seven-day reverse repurchase rate was kept at 5.75% on June 22 as forecast by all 29 economists in a Bloomberg survey. It is largely expected to stay at that level — the highest since July 2019 — for the rest of the year. 

The extended pause underlines the central bank’s stance that it’s ready to keep interest rates high to preserve currency stability. The rupiah breached the psychological level of 15,000 against the dollar last week as investors digested the prospect of higher Fed rates and slower global growth this year. 

Tepid export demand and declining commodity prices have severely cut down Indonesia’s trade surplus, eroding another pillar of support for the rupiah. BI spent nearly US$5 billion (RM23.25 billion) of its dollar reserves in May in part to defend its currency that weakened over 2% along with the rest of the region. 

The rupiah has been manageable amid stabilisation measures by BI, governor Perry Warjiyo said on June 22. He said liquidity in the banking system remains ample, and that the central bank will boost incentives to banks in order to boost lending. 

The central bank retained its GDP growth forecast for 2023 at 4.5%-5.3%, while noting that inflation continues to slow faster than expected. 

BI sees headline inflation, which already returned to the central bank’s 2%-4% goal last month, staying within target for the rest of the year. Core inflation, which strips out the impact of volatile and subsidised items, eased further to 2.66%, its lowest in nearly a year. — Bloomberg

  • This article first appeared in The Malaysian Reserve weekly print edition