World Bank advises Indonesia to keep monetary policy accommodative, FX rate flexible

JAKARTA: The World Bank said Indonesia should keep its monetary policy accommodative and make the rupiah exchange rate flexible amid external pressure, according to a report issued on Thursday, ahead of a central bank policy review.

The report was released after the Federal Reserve said at its monetary policy meeting it would begin closing the door on its pandemic-driven policy. Previous talk of US tapering triggered capital outflows and weighed on Indonesia's local currency.

"Indonesia could face challenging monetary policy trade-offs going forward," the multinational lender said in its Indonesia Economic Prospects report, noting that rising US yields are creating headwinds for the country. "Current economic conditions call for an accommodative monetary stance and exchange rate flexibility," it said.

Premature tightening could raise government borrowing costs, and delay an economic recovery if external pressures "force rate hikes down the road", it added.

Bank Indonesia (BI) is widely expected to keep its key policy rates unchanged at a record low at Thursday's announcement due at 0700 GMT.

The bank, which has cut rates by 150 basis points (bps) and injected over $57 billion worth of liquidity since 2020, has in the past said its policy objective was to balance keeping financial markets stable with efforts to support an economic recovery from the coronavirus pandemic.

The rupiah fell as much as 0.94% in early trading after the Fed projected an accelerated timetable for interest rate increases and opened talks on how to end its bond-buying programme.

In 2013, when the Fed announced it was reducing its bond buying programme, triggering "taper tantrum" emerging market outflows, BI was forced to lift its reference rate by 175 bps to put a floor under the rupiah, which lost more than 20% that year.

"While exchange rate flexibility could contribute to higher debt servicing costs in the short-term, the burden could be offset by a faster recovery, stronger exports and foreign investment inflows," the World Bank said.

A BI spokesman declined to comment due to a blackout period during a policy meeting.