Bank Indonesia holds rate steady to guard vulnerable currency

Bank Indonesia headquarters in Jakarta. Indonesia’s central bank left its benchmark interest rate at a record low to protect the currency, and said it had formulated a plan to deal with eventual US policy tightening.

Indonesia’s central bank left its benchmark interest rate at a record low to protect the currency, and said it had formulated a plan to deal with eventual US policy tightening. Bank Indonesia kept the seven-day reverse repurchase rate at 3.5% on Thursday, as expected by all 28 analysts in a Bloomberg survey. Interest rates have been on hold since February’s 25-basis point reduction, and are widely expected to stay at this level throughout 2021. “The decision is consistent with the need to maintain the exchange rate and financial system amid low inflation, and for the economy to recover from the pandemic impact,” Governor Perry Warjiyo said at a briefing in Jakarta. Monetary policy will remain loose and accommodative, he said.The decision comes with Bank Indonesia keen to protect the rupiah, given the weaker economic outlook amid the pandemic and the risk that potential US monetary policy tightening could spark a sell-off of emerging-market assets.The rupiah pared losses to close down 0.2% at 14,403 to the dollar. The benchmark Jakarta Composite Index of shares slid 2.1% to its lowest level since July 14.Indonesia was among emerging markets hardest hit in 2013 when the US Federal Reserve began unwinding its easy policy from the global financial crisis. This time, Warjiyo said Bank Indonesia had formulated a plan to deal with local fallout and had experience with policies to mitigate the impact, as well as ample foreign-exchange reserves.“I need to emphasise that the Fed’s tapering policy will not have as big an impact as the 2013 ‘Taper Tantrum,’” Warjiyo said. “It will affect us depending on how far we can manage the difference in domestic and foreign interest rates, especially portfolio investment, such as the yield on government securities.”“Bank Indonesia’s decision to keep rates unchanged appears inevitable as the Federal Reserve’s tapering draws closer. The Indonesian central bank has little scope to lower rates further and risk fuelling selling pressure in the rupiah. Our view remains for the central bank to leave rates unchanged through the remainder of this year and most, if not all, of 2022,” says Tamara Mast Henderson, Asean economist at Bloomberg.Warjiyo said the Fed has communicated its exit policy clearly and transparently, while markets already know how to digest the taper talk this time around. Bank Indonesia can deal with the fallout via a policy of triple intervention – in the foreign exchange market, domestic non-deliverable forwards market, and the government bond market – and by coordinating with the Finance Ministry to manage yield differentials from the US, he said.BI’s assessment “appears to be on the optimistic side,” said Nicholas Mapa, senior economist at ING Groep NV. “We’re sceptical that the market reception to the actual Fed Taper 2.0 will be as orderly as they expect.” Southeast Asia’s largest economy grew faster than expected in the second quarter – up 7.1% from a year earlier – but the pace is expected to slow in coming quarters with mobility curbs still largely in place, weakening consumption and business activity.