Bank Indonesia
Despite Bank Indonesia (BI) sticking to a tight monetary stance, two economists expect the central bank to cut its interest rate slightly in early 2016.
HSBC Indonesia country manager and CEO Sumit Dutta said BI would hold the rate at 7.5 percent until the end of this year in anticipation of a possible rate hike by the US Federal Reserve next month.
"BI believes a Fed rate hike in the US will cause capital outflow and make the rupiah volatile. We believe BI will cut its interest rate from 7.50 percent to 7.25 percent sometime in the first quarter of 2016," said Dutta in Jakarta on Friday.
Similarly, Centre for Economics and Business Research (Cebr) senior economist Danae Kyriakopoulou predicted the Fed would raise its benchmark rate. "Recovery in the US remains strong, making a December rate rise very likely. This will have huge global implications," she said.
The Fed rate hike, she continued, would boost capital outflows from emerging economies to the US and would put pressure on emerging market currencies.
The dangers of a rate increase and higher borrowing costs do not apply just to public sector debt, but also corporate debt, which has risen to high levels in Malaysia and Thailand. Another issue is currency mismatches, where debts are in dollars and revenues in local currencies, make rises in the dollar potentially dangerous.
However, Cebr expected the Indonesian central bank would cut its interest rate in 2016, as inflation would ease further.
BI has kept the benchmark interest rate at 7.5 percent since February, even though pressure on inflation has slowly subsided and the current account deficit has narrowed.
Earlier, Vice President Jusuf Kalla strongly criticized BI's hawkish monetary policy, which he said was against the government's pro-growth economic policy. According to Kalla, the high interest rate had led to an expensive and uncompetitive lending regime that suppressed growth. He dismissed BI's concerns over possible economic instability that might erupt if it lowered the rate.
Meanwhile, BI governor Agus Martowardojo stressed the need to maintain economic stability. BI feared a rise in the Fed's interest rate could spark massive capital outflows from emerging countries, including Indonesia, which would impact the rupiah volatility.
The central bank said it would consistently and cautiously pursue monetary policies that direct inflation toward its target, keep the current account deficit at a healthy level and support economic stability. (bbn)(+)
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