(Bloomberg) — Bank Indonesia left its benchmark interest rate unchanged for a second straight meeting to keep inflation under control in the face of surging food costs, even as policymakers signaled they were in no hurry to begin easing policy.
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The decision to keep the BI rate — formerly called the seven-day reverse repurchase rate — at a four-year high of 6% was predicted by all 29 economists in a Bloomberg survey. Governor Perry Warjiyo, who late last month had hinted that the rate will stay at the current level for some time, told reporters Thursday that the bank need not necessarily follow the US Federal Reserve in cutting rates.
That was Warjiyo’s way of saying that the BI has its own rate path, and the extended pause is part of the central bank’s “preemptive and forward-looking steps to ensure inflation remains under control within the target of 1.5%-3.5% in 2024.” As consumer price gains quickened for the second straight month in November, the governor said there are a “number of risks” to inflation, especially from food costs, that could derail price expectations.
It underlines the caution among Asia’s central banks, with the Philippines and Australia also refraining from any interest-rate cut talk amid lingering price pressures. This despite the recent signal from the Fed that it’s pivoting toward easing, which has driven funds back into emerging-market assets and buoyed currencies like the rupiah.
Still, Warjiyo is keeping a watchful eye on exchange-rate volatility as dwindling exports widen the current-account deficit and global rate expectations diverge. Any setback to the US easing signal could reverse capital flows and heap pressure on the rupiah, especially with an upcoming election season when the currency historically weakens.
The governor said BI will continue stabilizing the rupiah to mitigate any imported inflation. He said the space to ease policy might open up if the rupiah continues to strengthen more quickly and inflation slows, “but we will not rush.”
“We want to ensure that the inflation target of 1.5%-3.5% is achieved. That’s it. Period,” he said, referring to next year’s price target.
What Bloomberg Economics Says…
A rate cut in Indonesia still appears to be some way off… Even with the rupiah having recently recouped ground it lost this year against the dollar, the central bank doesn’t look convinced the currency is out of the woods.
— Tamara Mast Henderson, economist
For the full note, click here
BI keeping rate unchanged had little impact on the rupiah, with the currency holding an earlier loss against the greenback. The rupiah is about 0.1% weaker against the greenback this month, one of the worst performers in Asia, as uncertainty ahead of Indonesia’s national election in February grows.
The economy is battling rising food costs that have spurred volatile inflation to rise the fastest in nine months. That took November inflation to 2.86%, further above the midpoint of the central bank’s new target range for 2024. Price pressures may pose a threat to the already slowing growth of domestic demand in Southeast Asia’s biggest economy.
Warjiyo said the central bank expects the pace of global economic expansion moderating to 2.8% next year from an estimated 3% this year. Other key points from his briefing:
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The bank maintained its economic growth forecast for Indonesia at between 4.5%-5.3% this year, and 4.7%-5.5% in 2024, while the estimate for price gains in the current year was retained at 2%-4%
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The bank will strengthen monetary policy mix and synergy with the government to ensure inflation remains within target in 2024-2025
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Current account is seen moving between a surplus of 0.4% of gross domestic product to a deficit of 0.4% GDP this year
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The bank will remain watchful of the rupiah, Warjiyo said, adding that the local currency remains manageable in line with easing uncertainty
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Loan growth in November was at 9.74%, the fastest pace since March, with demand supported by trade and social services sector
–With assistance from Norman Harsono, Tomoko Sato and Clarissa Batino.
(Updates with more details from briefing)
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