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BI cautious amid rising external pressure
Bank Indonesia has decided to maintain its benchmark interest rate to ensure domestic stability as it signals cautiousness toward the possibility of rising pressures at the global level
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ank Indonesia has decided to maintain its benchmark interest rate to ensure domestic stability as it signals cautiousness toward the possibility of rising pressures at the global level.
After holding a two-day Board of Governors’ meeting, the central bank on Thursday kept its policy interest rate — a seven-day reverse repo rate — at 4.25 percent on the back of its efforts to maintain domestic macroeconomic and financial system stability, while supporting growth recovery.
It also maintained its lending facility and deposit facility rates at 5 percent and 3.5 percent.
As the central bank maintains a “neutral” stance, BI Governor Agus Martowardojo said its previous monetary easing efforts had been sufficient to maintain the country’s economic recovery momentum.
He said the central bank would continue monitoring external risks, such as uncertainties coming from the higher-than-expected interest rate hike of the United States’ Federal Reserve as well as the increase of oil prices.
According to BI’s monitoring, the US’ positive macroeconomic data and the latest development in the Federal Open Market Committee (FOMC) have led the global market to anticipate that the Fed will raise its fund rate more than three times throughout 2018.
“It is estimated that Fed rate hikes will occur in March, June and December. There will be [global] volatility approaching March or June, and it will occur in Indonesia as well,” Agus said, adding that the volatility would be temporary.
He stressed that BI would anticipate the situation by intervening in the domestic currency market should the rupiah pull away from its ‘fundamental value’, and maintain a continuous market mechanism.
The US’ strong economic data have contributed to the US dollar’s appreciation, causing many global currencies, including the rupiah, to continuously depreciate over the last few days.
The Jakarta Interbank Spot Dollar Rate (JISDOR) shows that the rupiah has been gradually depreciating against the greenback since early February, to a level of Rp 13,657 on Wednesday, a year-to-date low. The rupiah appreciated by 0.64 percent to Rp 13,570 at the close of market activity on the following day.
Agus pointed out several domestic risks that added to the pressures, including the ongoing recovery of companies’ financial condition, weak banking intermediary and inflation.
As it saw little room for monetary easing going forward, the central bank would continue maintaining its easing stance on the macroprudential side in a bid to boost bank loans, said BI deputy governor Perry Warjiyo.
Bank loans nationwide grew 8.2 percent year-on-year (yoy) in 2017, higher than 7.9 percent yoy seen a year earlier but still remaining in single digits, in contrast to the double-digit growth of a few years ago.
BI introduced in January several new macroprudential policies, which were aimed at boosting bank loans and improving liquidity, in a hope to trigger credit demand and economic activity.
Maybank Indonesia economist Myrdal Gunarto agreed that BI’s decision on Thursday would support the country’s macroeconomic stability and economic growth, yet projected that the central bank would probably tighten its monetary policy in June amid rising inflationary pressure.
He said the inflation rate would reach its peak after Idul Fitri festivities in mid-June, while at the same time the Fed would raise its fund rate according to its trajectory.
While Indonesia’s economic fundamentals remained strong, Myrdal said the impact of developed countries tightening their monetary policies was visible in the rupiah’s depreciation, while rising inflationary pressures would affect people’s purchasing power.
Bank Central Asia chief economist David Sumual expressed similar views that BI had taken the correct stance faced with external pressures, while adding that domestic growth, particularly in the manufacturing and housing sectors, had started to pick up.
