Indonesia central bank holds rates, but more tightening seen in 2019

Imaduddin December 20, 2018

JAKARTA: Indonesia’s central bank on Thursday kept its benchmark interest rate unchanged, as expected, though it reasserted it would act to defend the exchange rate when needed after a fresh wobble in the currency earlier in the day.

At its last 2018 policy review, Bank Indonesia (BI) held the 7-day reverse repurchase rate at 6.00 percent, matching the expectation of a Reuters poll.

Since May, the rate has been raised six times by a total of 175 basis points, with the last increase in November, as BI sought to slow capital outflows and put a floor under the rupiah.

The rupiah barely moved after the rate announcement. The currency fell 0.55 percent on Thursday after the Federal Reserve raised U.S. interest rates by 25 basis points, but supported by BI intervention recouped losses in later trade.

Governor Perry Warjiyo said the current level of rates are consistent with efforts to bring the current account deficit – seen around 3 percent of GDP in 2018 – to a healthier level next year and maintain attractiveness of domestic assets for foreign investors.

The rate decision also took into account the trend in global interest rates, including the U.S. Federal Reserve’s signal of two rate hikes, instead of three, in 2019.

That outlook means “U.S. Treasury yield will not rise as high as we initially thought,” Warjiyo said, explaining that it would spur a “portfolio investment reallocation out of advanced economies to emerging markets”.

PRESSURED RUPIAH

The rupiah has been under pressure much of this year due to the U.S. monetary tightening, the China-U.S. trade war and a widening Indonesian current account deficit. It reached levels not seen since 1998, before rebounding last month with the help of a $7.9 billion net inflow in November.

The governor reiterated his expectation of a more stable currency next year. However, he said BI will continue to stabilise the exchange rate to make sure it reflect fundamentals.

Analysts have said BI would likely still have to increase rates next year to counter possible capital outflows, noting a number of uncertainties in the global market, including the trade war and a possible U.S. economic recession.

Gareth Leather, senior Asia economist at Capital Economics, said BI’s decision to leave rates unchanged was “unlikely to mark the end of the tightening cycle given the likelihood of further falls in the rupiah over the coming year”.

But economists predicted a slower pace of rate hikes next year.

“I expect BI to raise its benchmark rate twice (next year), so it won’t be as aggressive as this year,” said Winang Budoyo, chief economist at Bank Tabungan Negara.

BI earlier cut its 2018 GDP growth outlook to 5.1 percent and 2019 to a range of 5.0-5.4 percent, from slightly higher rates. Officials, however, continued to argue that effect of its rate hikes should be cushioned by more relaxed banking credit and liquidity rules.

The central bank was also confident it would maintain the inflation rate within its comfort range until the end of next year, Warjiyo said.

Copyright Reuters, 2018
 

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