Bank Indonesia to Hold Interest Rates Steady With Currency Under Pressure

Indonesia’s central bank is expected to leave the benchmark interest rate unchanged as jitters over steeper US rates turn up the pressure on the rupiah.

(Bloomberg) — Indonesia’s central bank is expected to leave the benchmark interest rate unchanged as jitters over steeper US rates turn up the pressure on the rupiah.

Of the 30 economists surveyed by Bloomberg, 28 projected the seven-day reverse repurchase rate will remain steady at 5.75% on Thursday. Two expected a 25 basis-point increase — the first such prediction since the central bank last raised the policy rate in January. 

Indonesia’s monetary authorities efforts to balance price stability and economic growth have become increasingly difficult in the face of the Federal Reserve that’s still in tightening mode. That’s making the rupiah and other emerging market currencies the most-beaten against the dollar, exposing them to imported inflation and the risk of a selloff.

With the inflation rate seen, for now, to remain manageable within target, Bank Indonesia has said it will focus monetary policy on exchange rate stability.

Governor Perry Warjiyo said Tuesday that he would continue allowing bond yields to rise to contend with the impact of the Fed’s tightening on the rupiah.

Here’s what to look out for at the decision around 2 p.m. local time on Thursday: 

Weakening Rupiah

The currency has been under pressure this month, weighed by higher US Treasury yields as traders price in the prospect of a hawkish Fed. Foreign investors have grown more tepid on Indonesian assets and have sold $127 million worth of bonds and $1.2 billion worth of stocks this month, according to data compiled by Bloomberg. 

That’s caused the rupiah to drop 1.5% to a fresh five-month low against the dollar this month, and sent the yield on the benchmark 10-year note to as high as 6.75%, a level last seen in April.

The trade surplus narrowed further at home as exports dropped, deteriorating the nation’s current account to a bigger-than-expected deficit of $1.9 billion last quarter. 

“There is a sense that recent rupiah stability came at the expense of heavy intervention, given recent deterioration in the balance of payments” said Satria Sambijantoro, an economist at PT Bahana Sekuritas, who expects the BI to raise rates either at this meeting or in September to anchor FX stability.

“From a trade-weighted and real-effective exchange rate standpoint, the IDR will likely weaken further,” Sambijantoro said.

Policy Move 

With pressure building up on the currency and bets on rate cuts in emerging markets pushed back, investors now cannot help but wonder: Would BI’s next policy step be a cut or a hike? 

“We will be looking for any comments from Warjiyo suggesting that rate hikes would be considered now that interest rate differentials have narrowed significantly,” said ING Groep NV’s economist Nicholas Mapa.

PT Bank Danamon Indonesia’s economist Wisnu Wardana expects the monetary stance to remain neutral amid low inflation turnout, unless another Fed surprise rattles the markets and causes a sharp weakening in the rupiah.

Economists in Bank Mandiri still see a cut to be the next move, but not before the second quarter of next year. 

Growth Outlook 

Southeast Asia’s biggest economy expanded by a quicker-than-expected 5.2% last quarter on more robust consumption, but sustaining it could be more challenging. 

Lower commodity prices, weaker exports, and an economic slump in China are posing downside risks to Indonesia’s growth, which the government forecasts to reach 5.1% this year and 5.2% in 2024. 

The country is counting on election-related spending and infrastructure projects to help sustain the domestic demand, which makes up more than half of its gross domestic product.

–With assistance from Matthew Burgess.

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