Aug 21 2024: Indonesia’s central bank opted to keep interest rates unchanged on Wednesday, focusing on stabilizing the rupiah before considering any potential rate cuts later in the year.
Bank Indonesia (BI) maintained its benchmark 7-day reverse repurchase rate at 6.25%, a level it has held since April, aligning with the expectations of all 30 economists surveyed by Reuters. Additionally, the overnight deposit facility and lending facility rates were kept steady at 5.50% and 7%, respectively.
BI has indicated the possibility of rate cuts in the fourth quarter, but for now, the central bank’s priority is to support further strengthening of the rupiah against the U.S. dollar, Governor Perry Warjiyo stated during a press conference.
“A strong rupiah is beneficial for the Indonesian economy. It leads to lower prices, especially for food, and helps maintain low inflation through reduced imported inflation,” Warjiyo explained.
Inflation has remained within the central bank’s target range of 1.5% to 3.5% since mid-2023, with last month’s inflation easing to 2.13%, the lowest since February 2022.
In April, BI surprised markets with a rate hike aimed at supporting the rupiah, which had previously dropped to four-year lows against the U.S. dollar due to risk aversion driven by geopolitical concerns and uncertainty surrounding U.S. interest rates, leading to capital outflows.
The rupiah has appreciated by about 5% this month, trading near its strongest level of the year, as the U.S. dollar weakened on expectations of a potential Federal Reserve rate cut in September. Warjiyo noted that BI anticipates the Fed will cut rates twice this year, followed by three more cuts in 2025.
Some economists suggest that BI might wait for a Fed rate cut before initiating its own policy easing.
“Our expectation is for BI to begin monetary easing with a 25-basis-point rate cut in the fourth quarter, following a Fed rate cut,” commented Brian Lee, an economist at Maybank Investment Banking Group. “Given BI’s focus on rupiah stability, the Indonesian central bank may prefer to mitigate any risk of a resurgence in U.S. dollar strength and rising U.S. yields for now.”
The rupiah was trading at 15,480 per dollar on Wednesday, slightly weaker by 0.4% compared to the previous day when it reached its highest level since the start of the year.
Elsewhere, some central banks have begun easing policies, including those in the Philippines and New Zealand. The Bank of Thailand also held its key interest rate steady on Wednesday.
