B

ank Indonesia (BI) held its benchmark rate steady on Tuesday, maintaining its tight monetary stance at its last meeting before president-elect Joko '€œJokowi'€ Widodo starts his presidency later this month.

The benchmark interest rate of 7.5 percent was consistent with efforts to control inflation and reduce the current-account deficit to sustainable levels, BI said in a statement released after its policy meeting on Tuesday. The BI rate has been unchanged since November.

BI warned of the '€œuneven pace'€ of global economic recovery that warranted vigilance, especially as the strong rebound in US economy had occurred at a time when developing countries had to deal with the economic slowdown.

Expectations that the US would hike its interest rate could spawn '€œcontagion risks'€ in the region, the Indonesian central bank warned.

Economists have said that with the increase in interest rate in the US expected to make dollar assets more attractive, BI may have no choice but to keep domestic interest rates high to keep rupiah assets in demand and prevent capital outflows.

'€œInterest rates are likely to remain at their current elevated levels until at least the end of the year,'€ said Gareth Leather, an economist with Capital Economist in London.

Jokowi, who will take office as Indonesia'€™s seventh president on Oct. 20, has promised to spur gross domestic product (GDP) growth to 7 percent, a campaign pledge that looks difficult to achieve if BI does not loosen its monetary policy.

Jokowi'€™s economic team has argued that the central bank should start loosening its tight monetary policy, arguing that the high interest rate may be counterproductive to economic growth.

'€œWe believe concerns about the current account will continue to outweigh worries about slowing growth,'€ said Leather. '€œPresident-elect Jokowi should not expect any favors from Bank Indonesia.'€

Jokowi has promised to undertake bold reforms to spur growth in Southeast Asia'€™s largest economy but investors have begun to show cautiousness over whether he can walk the talk given his limited legislative control.

The rupiah has depreciated 1.8 percent against the US dollar while the yield for the benchmark 10-year government bond has climbed at least 30 basis points since the coalition of parties belonging to Jokowi lost their battle in the House of Representatives to maintain direct elections on Sept. 26.

On Tuesday, the rupiah was traded at 12,190 per dollar before the central bank'€™s rate decision, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).

'€œRecent political developments, largely viewed in the media as attempts to undermine incoming president Jokowi, have spooked markets,'€ Chua Hak Bin, an economist with Bank of America Merrill Lynch, wrote in a note on Tuesday.

BI pointed to the combination of domestic and external factors behind the recent depreciation of the rupiah.

On the domestic front, rupiah sentiment was linked to the wait-and-see attitude of investors concerning the formation of the new Cabinet as well as future government work programs, including a policy related to fuel subsidies, BI'€™s policy statement read.

The central bank also noted that '€œfluctuations in the rupiah were congruent with shifts in other currencies in the region.'€