Bank Indonesia Holds Rates, Pledges More Support for Rupiah

(Bloomberg) -- Indonesia’s central bank left its benchmark interest rate unchanged and pledged greater efforts to stabilize a currency that’s weakening amid global market volatility and rising U.S. yields.

Bank Indonesia kept the seven-day reverse repurchase rate at 3.5% on Thursday, as predicted by all 28 economists surveyed by Bloomberg. Governor Perry Warjiyo and his board have cut the rate by 150 basis points since the beginning of last year to bolster the economy during the coronavirus pandemic.

Thursday’s decision “is not a surprise at all, given the unsettled global yield environment,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. After taking rates to a record low last month and easing lending standards, “there’s a sense that it will get increasingly hard for BI to find more rabbits to pull out of its hat.”

The rupiah and the country’s benchmark stock index were little changed after the decision.

Thursday’s hold comes with currency concerns back in play as a rise in U.S. Treasury yields has sparked a sell-off in emerging markets. Indonesian sovereign bonds had seen $1.5 billion of outflows this year as of Monday and the rupiah has fallen 2.6% against the dollar over the past month, prompting the central bank to intervene in markets -- efforts it pledged to continue Thursday.

“The rupiah was certainly a key factor toward today’s hold decision, but we believe BI still remains relatively more dovish compared to other EM central banks,” said Charu Chanana, lead Asia economist at Continuum Economics in Singapore. “Indonesia’s economic growth is still fragile, and threats to the central bank’s independence will likely keep the central bank on a dovish path for some more time.”

Limited Space

Keen to maintain an interest-rate differential with other countries to attract foreign funds, Warjiyo has said room for further cuts is limited. The latest draft of an omnibus bill, which would more closely align the central bank’s mandate with government priorities and formalize its direct funding of government bonds, has concerned markets, though less so than when reforms were first mooted last year.

Warjiyo skipped a question on the omnibus bill during Thursday’s briefing.

Both the central bank and the government have stepped up measures -- such as easing rules on mortgage and vehicle loans, cutting the tax on car sales and boosting the stimulus budget -- as they try to meet the target of around 5% economic growth this year. The nation’s vaccination rollout is expected to boost confidence and business activity.

Surveys have shown consumer confidence and spending on the recovery track. However, headline and core inflation continued their downward trend last month, allowing the central bank to keep policy loose.

“Bank Indonesia has made clear that its focus has shifted firmly toward defending the rupiah amid growing outflows. But it also continues to engage in substantial primary market bond purchases this year,” which could complicate its currency policy goals, said Joseph Incalcaterra, chief Asean economist at HSBC Holdings Plc in Hong Kong. “BI will have to walk a fine line in coming months if global yields continue to rise.”

(Updates with more details throughout)

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2021 Bloomberg L.P.