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Room for easing policy ending given slower inflation, Fed factors
Room for easing monetary policy in Indonesia is closing as external risks pose uncertainties to global and domestic economies while the inflation rate in the country is slowing, economists have estimated
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oom for easing monetary policy in Indonesia is closing as external risks pose uncertainties to global and domestic economies while the inflation rate in the country is slowing, economists have estimated.
Bank Indonesia (BI) decided on Thursday to hold its policy rate — the BI seven-day reverse repurchase (repo) rate — unchanged at 4.25 percent after holding a two-day Board of Governors meeting since Wednesday.
It also kept the deposit facility rate at 3.5 percent and the lending facility rate at 5 percent.
The central bank cut its policy rate by 50 basis points (bps) in total in August and September after keeping it unchanged for nine months in a row. It has slashed 200 bps of its benchmark rate since January last year.
“We see in our assessment that both current and future inflationary pressures are relatively controlled. [The possibility that] external risks [can adversely affect the rupiah exchange rate] is still open. Those are the reasons why we hold the rate,” BI executive director for monetary and economic policy Dody Budi Waluyo told a press conference on Thursday.
Controlled inflation is supported by a declining trend in core inflation due to low import prices and limited consumption, he added. Core inflation stood at 3 percent year-on-year (yoy) in September after touching a historical low of 2.98 percent in August.
Indonesia’s consumer price index hovered at 0.13 percent in September, bringing the annual inflation rate to 3.72 percent yoy. The figure is still within the central bank’s expectation of below 4 percent and the government’s target of 4.3 percent by year-end.
“I think BI will hold its benchmark rate until the end of next year considering the expected three-time increase in the United States Federal Reserve fund rate by 75 bps in total,” PermataBank economist Josua Pardede wrote in a text message, adding that the current policy rate had been in line with inflation and rupiah targets.
After 2018, BI’s policy direction will be subject to the effects of the Fed balance sheet normalization, beginning at the end of October, its fund rate hikes and the US’ economy data.
The Fed’s normalization and fund rate hikes will potentially push up the US Treasury yield and lead to a stronger greenback, that will eventually suck up capital from emerging markets, such as Indonesia.
CIMB Niaga chief economist Adrian Panggabean said a further rate cut would trigger profit taking and shake up the assets market. “Going forward, BI no longer has room to lower its benchmark rate,” he said.
The central bank expects the Fed to push its fund rate up in December, that has been priced in by the market. Now, BI is paying more attention to the rattles caused by a change at the Fed’s chairs as the new leader will reflect the institution’s stance in the future.
“The market will continue to make assessments during the process and those assessments will shake the market,” BI Governor Agus Martowardojo said separately, adding that geopolitical developments in Europe and the Korean Peninsula also had his office’s attention.
Bank Tabungan Negara (BTN) chief economist Winang Budoyo said 4.25 percent would be the lowest rate level at the moment and the central bank would keep it unmoved until June 2018. “BI’s stance can change in the second half of 2018 in which it will increase its policy rate if the Fed consistently increases its benchmark rate,” he stated.
