Indonesia keeps rates steady to support wobbly rupiah

19 Mar, 2021

JAKARTA: Indonesia’s central bank kept its key interest rate steady at a record low on Thursday, holding fire after a bout of monetary support during the pandemic, and pledged to strengthen currency intervention amid global market uncertainty.

Bank Indonesia (BI) left the benchmark 7-day reverse repurchase rate unchanged at 3.50%, as widely expected in a Reuters poll, after cutting them in February.

“The rate decision was in line with the need to maintain rupiah stability amid rising uncertainty in the global financial market,” Governor Perry Warjiyo said in a virtual news briefing.

Policymakers are trying to balance the need to support Indonesia’s coronavirus-hit economy, Southeast Asia’s largest, with concerns further monetary easing could weigh on the rupiah, already under pressure due to capital outflows.

The rupiah fell more than 3% while bond yields rose in the past month, as investors dumped riskier assets broadly as rising US bond yields sparked global volatility.

The currency opened 0.5% higher after the Federal Reserve reiterated its commitment to keeping US interest rates low, but pared some of those gains during the day.

The governor said the rupiah’s drop was “relatively under control”, while the rise in Indonesian bond yields were “within fair limits”, adding that the Fed’s “dovish signal” would calm markets.

But Warjiyo pledged to boost efforts to stabilise the currency including through a “triple” intervention in the country’s spot foreign exchange, domestic non-deliverable forward and bond markets.

Warjiyo said BI had been “aggressive” in its monetary easing last year and that the economy continues to improve. BI has cut rates by a total of 150 basis points and injected 776.87 trillion rupiah ($54 billion) into the financial system since the pandemic started, he added.

Indonesia’s economy suffered its first full-year contraction in over two decades in 2020 as it battled the highest coronavirus caseload in the region, but is expected to rebound as a mass vaccination programme is rolled out.

BI expects the economy to grow between 4.3% and 5.3% this year after contracting 2.07% in 2020.

Analysts expect BI to have limited scope to loosen policy further given the monetary stimulus it has already provided and the ongoing global market volatility, which has invoked memories of a so-called “taper tantrum” in 2013.

That year, the Fed’s announcement that it would tighten US monetary policy sparked emerging market turmoil and capital outflows, driving the rupiah down 21% and prompting BI to aggressively hike rates.

“There is a sense that it will get increasingly hard for BI to find more rabbits to pull out of its hat,” said Wellian Wiranto, an economist at OCBC. In a separate news briefing, Finance Minister Sri Mulyani Indrawati said Indonesia will be “vigilant” to avoid a similar situation like in 2013.

She called on global policymakers to provide clear guidance on the adjustment of their policies “to minimise market reaction, which sometimes overreacts or (is) unnecessarily damaging especially to emerging and developing countries”.

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