Indonesia CB signals no further rate hikes after holding steady

Indonesia’s central bank held interest rates unchanged at a review on Wednesday, as expected, saying the current benchmark level remained consistent with keeping inflation in check and maintaining the stability of the rupiah currency.

Bank Indonesia (BI) kept the benchmark 7-day reverse repurchase rate at 6.25 per cent, as predicted unanimously by 33 economists polled by Reuters.

Bank Indonesia also left unchanged the overnight deposit facility rate at 5.50 per cent and the lending facility rate at 7.00 per cent.

Bank Indonesia last month raised interest rates in a surprise move, seeking to try to entice foreign portfolio investors to buy Indonesian assets and strengthen the currency.

Indonesia’s central bank held interest rates unchanged on Wednesday, as expected, with Governor Perry Warjiyo reiterating that the current benchmark level is likely enough to keep inflation in check and the rupiah currency stable.

Bank Indonesia (BI) kept the benchmark 7-day reverse repurchase rate at 6.25 per cent, as predicted unanimously by 33 economists in a Reuters poll. It also left two other main policy rates unchanged. The central bank last month raised interest rates by 25 basis points in a surprise move to attracts foreign portfolio investment and strengthen the currency. It has delivered a cumulative 275bp in rate hikes since mid-2022.

The rupiah has recovered some ground after falling to four-year lows against the US dollar in April. However, the currency remains vulnerable to changes in global risk sentiment related to the outlook for US monetary policy and global conflicts.

BI Governor Warjiyo said on Wednesday the decision was in line with “pro-stability monetary policy” to manage price pressures and the rupiah exchange rate.

“We think the rate hike of 25 basis points last month is sufficient to continue to attract inflows and stabilise the rupiah, while ensuring inflation remains within the target range,” he told reporters.

The April hike was in anticipation of capital outflows if the US Federal Reserve does not cut rates at all this year, Warjiyo said.

But recent data and statements by Fed policymakers have suggested that a rate cut by the end of 2024 is the most likely outcome, the governor said, stressing that other external factors have also improved since the April monetary review.

Indonesian monetary policymakers will remain data-dependent in their determination for interest rate policy, he added.

A Fed rate cut would open a window for BI to ease its own policy rate, said Capital Economics analyst Gareth Leather.

“We think interest rates will be left unchanged over the next few months, but there is a good chance of a cut before the end of the year,” Leather said, adding that the timing would depend on the performance of the rupiah.