MNI STATE OF PLAY: Dovish BI Not Feeling Rate Pressure, Yet

Indonesia’s central bank remains “vigilant” against inflation and currency volatility, but it is still unconvinced that hiking its benchmark interest rate would have a significant impact on either factor in current markets.

Bank Indonesia on Thursday left its seven day reverse repo unchanged at the record low of 3.5% as the rupiah fell through the 15,000 barrier against the USD for the first time since 2020, (See: MNI BRIEF: Rupiah Falls Below Key Level As Bank Indonesia Holds).

While it was widely expected that rates would be held, BI was seen as being under rising pressure to hike and there were expectations of more hawkish commentary from the central bank, (See: MNI STATE OF PLAY: Pressure On Indonesian CB To Hike Rates).

GOVERNOR REMARKS

In a press conference after the decision, however, BI Governor Perry Warjiyo said he believed the rupiah should be strengthening due to Indonesia’s strong export performance and a current account surplus and blamed the weakness of the currency on global factors.

The rupiah is down 4.9% so far this year, but BI points out that this is less than the falls in neighbouring countries such as Malaysia, India, and Thailand. BI has noted that the Malaysian currency has dropped by more than 6% this year, even though Bank Negara Malaysia has hiked rates, (See: MNI INSIGHT: Stable Ringgit Key As Malaysia CenBank Tightens).

The bank says that measures such as increasing money market interest rates and intervening in financial markets will help stabilise the currency.

INFLATION

BI’s fight against inflation has been helped by subsidies from the Indonesian government, worth around US$23 billion, and CPI inflation is at 4.35% as of May, just outside the 2% to 4% target range.

Core inflation, however, is more moderate and “manageable” at 2.63% and a sign that inflation expectations are under control.

Instead of pointing to an interest rate hike ahead, BI is now emphasising its commitment to other measures which would normalise monetary policy, such as the gradual increase in the statutory reserve requirements for commercial banks, which has so far soaked up around US$14.6 billion in liquidity.