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BI keeps key rate same amid signs of economic recovery
Bank Indonesia (BI) kept its key interest rate unchanged for a fourth consecutive month, as a stabilize rupiah and declining inflation allowed the central bank to prolong the pause in monetary tightening
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ank Indonesia (BI) kept its key interest rate unchanged for a fourth consecutive month, as a stabilize rupiah and declining inflation allowed the central bank to prolong the pause in monetary tightening.
BI's six-man board of governors led by Agus Martowardojo kept its interest rate at 7.5 percent, a four-year high that has been kept the same since November, as the economy is 'running on the right track'.
Agus, however, maintained a cautious stance, despite the fact that the country recently saw returning foreign fund inflows on the back of improved macroeconomic indicators.
The BI governor warned that challenges ahead remained, as the road ahead would remain rocky and bumpy due to external uncertainties, notably the gradual pullback of US quantitative easing and worse-than-predicted economic slowdown in China, Indonesia' largest trading partner.
'At no time should we be complacent ' the bumpy road ahead necessitates wide-ranging policy initiatives to enable a smooth ride for the Indonesian economy,' he said on Thursday before the board of governors meeting.
As the elections loom, the central bank has shown little interest in impressing politicians by giving an additional monetary boost to the economy, with Agus emphasizing the need to prioritize stability over growth.
'With the general elections on our doorstep, maintaining macroeconomic stability is key,' he stated. 'Macroeconomic stability, in our view, is in the element of continuity for the Indonesian economy in the transition.'
BI's decision to retain its policy rate was well-received by markets, with both Indonesian equities and fixed-income assets rallying on Thursday.
The Jakarta Composite Index (JCI) advanced 0.89 percent to close at 4,726.17.
The yield for 10-year government bonds dropped one basis point to 8.04 percent, prices from the Inter Deal Market Association showed, as quoted by Bloomberg.
The inflows of foreign funds in the stocks and bonds market propelled the rupiah, which gained 0.4 percent to reach 11,383 per US dollar as of 4.29 p.m., according to prices from local banks.
Nevertheless, economists believe that the central bank might not be too keen on the latest movement of the rupiah, with a stronger currency expected to undermine the country's competitiveness. The rupiah has appreciated by 7 percent year-to-date, the most among emerging market currencies.
'BI may fear that raising the BI rate could lead to an even greater appreciation of the rupiah, which might hurt the trade balance further,' Bank Central Asia (BCA) economists led by David Sumual wrote in a research note.
Analysts say that BI's hawkish monetary stance may not change any time soon, as the high uncertainty in the global economy might trigger unexpected capital outflows.
Inflation slowed to an eight-month low at 7.75 percent last month, but electricity rate increases, scheduled to take place early May, will also exert additional pressure on core inflation. Meanwhile, the trade balance, which has been in surplus for three consecutive months, surprisingly swung into a US$430 million deficit in January.
All these factors mean that BI may have more to do in terms of monetary tightening to ensure stability, as well as making the economy more resilient against unexpected external shocks.
'Data continue to suggest an extended hold for the foreseeable future while maintaining a hawkish bias,' ANZ economist Daniel Wilson said. 'We don't expect Bank Indonesia to unwind the tighter policy settings in the second half of the year.'
