21-9-2023 (JAKARTA) Indonesia’s central bank, Bank Indonesia (BI), maintained its benchmark interest rates for the eighth consecutive month on Thursday, September 21. With a focus on ensuring the stability of the rupiah and inflation remaining within the target range, BI held the seven-day reverse repurchase rate steady at 5.75%, in line with expectations from 31 economists surveyed by Reuters. The other two main rates were also left unchanged.
BI’s decision aligns with analysts’ predictions that the central bank will keep rates unchanged until global uncertainties subside, given concerns about pressure on the currency. Governor Perry Warjiyo stated that the benchmark rate reflects BI’s commitment to maintaining inflation within the target range for 2023 and 2024.
The central bank also announced a reduction in the inflation target range for 2024, with the range lowered to 1.5% to 3.5%.
Although the rupiah has remained the best-performing currency in emerging Asia, it has gradually weakened against the US dollar in recent weeks, reaching its lowest level in six months. This depreciation comes amid rising US Treasury yields and an increase in Indonesian bond yields.
BI has been striving to strike a balance between currency stability, inflation control, and sustaining economic growth in Southeast Asia’s largest economy, especially as exports decline due to softening commodity prices. “Monetary policy remains focused on controlling the stability of the rupiah exchange rate as an anticipatory and mitigation measure against the spillover impact of global financial market uncertainty,” explained Warjiyo during a press conference.
BI anticipates that the US Federal Reserve will raise rates in November, which could maintain the strength of the US dollar. Additionally, a slowdown in China, Indonesia’s major trading partner, may exert pressure on Indonesian exports.
The central bank’s room for policy easing is limited due to the strength of the US dollar and the pressure on Indonesia’s balance of payments, according to Fakhrul Fulvian, an economist with Trimegah Securities. He suggested that the possibility of easing measures will only arise next year.
Capital Economics, a consultancy firm, has revised its expectation for BI’s first rate cut from October to December. Analyst Gareth Leather noted that BI appears to have been influenced by the Fed’s hawkish comments, emphasizing the need to maintain rupiah stability due to Indonesia’s substantial foreign currency debt.
BI has maintained its GDP growth target for 2023 within a range of 4.5% to 5.3%, compared to the 5.3% growth projected for 2022.
Inflation, which peaked at nearly 6% last year due to high energy and food prices, returned to BI’s target range of 2% to 4% earlier than expected this year. In August, inflation remained close to the midpoint of the range at 3.27%.
As part of its efforts to deepen domestic financial markets and attract foreign capital inflows, BI has started offering its own notes this month. Governor Warjiyo reported a positive market response to the notes, with multiple oversubscriptions in the first two auctions, during which BI sold a total of 37.7 trillion rupiah (US$2.45 billion). It was disclosed that 5% of the notes have been traded in the secondary market, primarily purchased by non-residents. The size of future auctions will depend on market demand, added the governor.
