24-8-2023 (JAKARTA) Bank Indonesia (BI), the central bank of Indonesia, has decided to maintain its interest rates at their current levels in an effort to achieve its inflation target. The bank also emphasized its intervention in currency markets to ensure stability for the Indonesian rupiah.
Governor Perry Warjiyo announced that BI plans to introduce new securities in rupiah, utilizing its holdings of government bonds as the underlying asset. This new monetary instrument aims to attract foreign portfolio capital flows and support the country’s economic growth.
During its monthly policy review, BI kept the benchmark 7-day reverse repurchase rate steady at 5.75 percent, in line with expectations from economists surveyed by Reuters. The bank also maintained its other key rates.
BI has been striving to balance several objectives, including currency stability, inflation control, and sustaining economic growth in Southeast Asia’s largest economy. The country’s exports have been affected by declining commodity prices and global economic weakness.
While there have been calls for rate cuts to stimulate growth after inflation dropped below BI’s target earlier than anticipated, some economists argue that further tightening is necessary to narrow the rate differentials with US assets and prevent the depreciation of the rupiah.
Governor Warjiyo stated that BI’s monetary policy will focus on guiding inflation and domestic growth. In anticipation of a potential rate hike by the US Federal Reserve in September, BI plans to continue its currency intervention in the spot and domestic non-deliverable forward markets, while relying on the newly introduced securities.
The rupiah, which had been gradually weakening since mid-July and reached its lowest levels since March, strengthened by 0.3 percent against the US dollar prior to the announcement and remained steady after the rate decision.
While the rupiah has seen a 2 percent increase so far this year, the currency, along with bond yields, has faced pressure due to rising US Treasury yields and economic challenges in China, a significant trading partner for Indonesia.
Despite Indonesia’s better-than-expected economic growth in the second quarter driven by increased household spending, the outlook for the remainder of 2023 remains uncertain. Contracting exports and the upcoming general election scheduled for February 2024 have limited investment decisions.
Inflation slowed down in July to 3.08 percent, which is within BI’s target range of 2 percent to 4 percent.
Economist Radhika Rao from DBS Bank commented on BI’s decision, stating that the bank is signaling a preference for various intervention efforts to attract more US dollar inflows and address currency depreciation pressures. She described the rate decision as a “middle path” to balance stability and inflation priorities.
BI has maintained its economic growth forecast for 2023 in the range of 4.5 percent to 5.3 percent. The bank also expects inflation to remain within the target range for this year and the next, with the target range shifting to 1.5 percent to 3.5 percent.
