Indonesia central bank keeps rates steady, to monitor inflation risks

By Gayatri Suroyo and Stefanno Sulaiman

JAKARTA (Reuters) -Indonesia’s central bank kept interest rates unchanged on Thursday, as expected, noting the benchmark level was adequate to anchor inflation in the next two years and despite renewed volatility in the exchange rate of the rupiah currency.

Bank Indonesia (BI) left the benchmark 7-day reverse repurchase rate unchanged at 6.00%, as expected by a strong majority of economists polled by Reuters, following October’s surprise rate hike. Its two other policy rates were also kept steady.

BI Governor Perry Warjiyo said the decision was consistent with maintaining the rupiah’s stability and to mitigate against imported inflation, although he said inflationary risks remained, stemming from rising global energy prices and high domestic food prices.

“Going forward, Bank Indonesia will continue to monitor a number of risks that could disrupt inflation, including the impact of high global energy prices, domestic food prices and pressure from the depreciation of the rupiah exchange rate on imported inflation,” the central bank said in a statement.

The central bank has been juggling the need to support economic growth with pressure on the rupiah.

“This 6% policy rate is still consistent to make sure next year’s inflation is not higher than 3.2%,” Warjiyo later told a press conference, referring to BI’s 2024 inflation rate prediction.

Responding to a question on the need for further tightening, the governor stressed future rate decision will be data dependent.

Inflation in October picked up slightly to 2.56%, but remained within BI’s 2% to 4% target range for this year.

Inflation will stay within the target range in 2023 and 2024, when the range will be lowered to 1.5% to 3.5%, Warjiyo said.

The rupiah has been highly volatile against the U.S. dollar in the past few weeks, sensitive to swings in market sentiment about the Federal Reserve’s tightening cycle.

It posted its biggest one-day drop since February on Wednesday, but rebounded slightly on Thursday. It gained a touch against the U.S. dollar after BI’s decision to trade at 15,550 at 0815 GMT.

Comments by Warjiyo suggested BI was done with its rate increases, which have totalled 250 bps since August 2022, although the length of the Fed’s “higher-for-longer” U.S. rates and other global factors may still force a hike, said Enrico Tanuwidjaja, an economist with UOB.

UOB revised down its prediction of BI’s further tightening to one more 25 basis point hike, from two such hikes by the end of 2024’s first quarter.

Capital Economics said Warjiyo’s comments suggested the end of the bank’s tightening cycle, and predicted a cut next year.

“Our forecast is that interest rates will be left unchanged in the near term before a cut in April 2024,” said Gareth Leather from the consultancy firm.

BI kept its outlook for 2023 GDP growth at a range of 4.5% to 5.3%, with spending for general elections in February 2024 seen boosting economic activities going forward.

Southeast Asia’s largest economy grew at its slowest pace in two years of 4.94% in the third quarter, as exports shrank and household spending softened.

(Reporting by Gayatri Suroyo, Stefanno Sulaiman, Fransiska Nangoy and Bernadette Christina; Editing by Kanupriya Kapoor and Raju Gopalakrishnan)