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Friday, September 18th, 2020

Indonesia keeps benchmark rate unchanged amid currency slump

by November 17, 2016 General

Governor Martowardojo, cites global uncertainty. — Reuters file picGovernor Martowardojo, cites global uncertainty. — Reuters file picJAKARTA, Nov 17 — Indonesia’s central bank kept its benchmark interest rate unchanged after six cuts this year, seeking to calm financial markets in the wake of Donald Trump’s upset victory in the US presidential election.

Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.75 per cent today, in line with the forecasts of all but three of 21 economists surveyed by Bloomberg.

Bank Indonesia had reason to pause after taking aggressive action this year to boost growth amid a benign inflation environment. Heightened market volatility and expectations of more US interest rate increases caused the rupiah to plunge as much as 3.7 per cent against the dollar last week, prompting the central bank to intervene to stabilize the currency.

“The global uncertainty has become a bit of a factor and in addition to that I think inflation becomes a bit more of a constraint because we think it’s going to start to accelerate in the next six months,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. The central bank “is a little more cautious at this stage”.

The central bank is forecasting growth of about 5 per cent for this year and 5 per cent to 5.4 per cent in 2017, well below the 7 per cent targeted by President Joko Widodo when he came to office two years ago. Inflation is seen at 3 per cent to 3.2 per cent at the end of the year, inside the bank’s 3 per cent to 5 per cent target.

Indonesia’s Coordinating Minister for Economic Affairs Darmin Nasution said in comments cited by Detik website ahead of the decision that further rate cuts would depend on “whether or not we can manage inflation”.

Fed speculation

Martowardojo said global factors had a major role to play in the bank’s decision and it will continue to guard the currency against volatility. Going forward, the bank will coordinate with the government to ensure there’s enough liquidity in the market, he said.

“This policy is in line with Bank Indonesia’s prudence in responding to the rising uncertainty in global markets after US presidential elections,” he said. “We are responding to external uncertainty amid a stable domestic situation.”

The surprise win by Trump has stoked investor bets on faster inflation and Federal Reserve interest-rate increases, boosting the dollar — especially against emerging-market currencies like Indonesia’s rupiah.

“With the US set to start hiking interest rates soon, we think BI’s easing cycle is nearing an end,” said Oliver Jones, an economist at Capital Economics in London. With the risk of more aggressive Fed rate increases, “in this environment, BI would be unlikely to risk loosening policy,” he said. — Bloomberg