B

ank Indonesia (BI) will likely maintain its benchmark interest rate although there are some concerns that the expected increase in the US interest rate this week could trigger a global fund outflow from Indonesia'€™s financial markets.

All eight economists contacted by The Jakarta Post on Wednesday believed that BI'€™s six-member board of governors would keep the BI rate at 7.5 percent during its monthly meeting to be held on Thursday. If maintained, the rate will have stayed at the same level since February.

BI'€™s meeting coincided with the gathering of the Federal Reserve'€™s (Fed) Federal Open Market Committee (FOMC) held on Wednesday and Thursday.

The FOMC meeting is seen as one of the key events that will determine the course of the global economy as many wait to see whether or not the Fed'€™s policy makers will eventually raise the benchmark US interest rate for the first time in almost 10 years. Some analysts believe the Fed will raise the rate to modestly temper growth.

Sean Yokota, head of Asia strategy at SEB Bank, considered the timing of the BI meeting '€œunlucky'€ because it would be held just before the FOMC meeting, the result of which would stir movements in the global market.

'€œThe best course of action is not to cut interest rates prematurely and to make sure that there is enough real yield to prevent outflows that could lead to financial instability,'€ he wrote in an email on Wednesday.

Gareth Leather, Asia economist at macroeconomic research company Capital Economics, said that BI had little choice for now but to wait and see what the Fed did and how the market reacted.

Leather played down concerns over possible massive outflows if BI did not jack up its rate after Thursday'€™s meeting. According to him, a Fed tightening move was no longer a surprise and a big sell-off was not its core scenario.

Meanwhile, Bank Danamon economist Dian Ayu Yustina, OCBC Bank economist Wellian Wiranto and Bank Central Asia (BCA) chief economist David Sumual agreed that BI was now trapped in a '€œcatch-22.'€ While raising the rate would appeal to foreign investors, a higher rate would weaken economic growth.

On the other hand, lowering the rate might be good for the economy as it would translate into relatively cheaper bank financing, but it would create higher risks for the rupiah.

'€œIt is not an easy dilemma to resolve, obviously. Hence, our sense is that it is best to wait and see what happens after the Fed announces its decision before moving rates either way,'€ said Wellian in his email.

According to David, BI might hold an additional meeting to raise its rate if the Fed'€™s policy outcome turns out to be more aggressive than expected and spurs capital outflows. '€œBut such move may be too late to contain the volatility,'€ he said.

Separately, HSBC economist Su Sian Lim applauded the central bank, saying that it had already done its utmost to prepare for the likely bouts of volatility in the coming months that would stem from the Fed'€™s decision.

'€œ[BI has] strengthened the country'€™s external balances both though current account related reforms and various measures to help FX [foreign exchange] reserves,'€ she said.

Meanwhile, UOB Group economist Ho Woei Chen said that room to cut rates would be available for BI later this year when the domestic headline inflation rate '€œeased more meaningfully'€ in November and December.
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