BI May Postpone Rate Cut Until September
Jakarta. Bank Indonesia may leave its benchmark interest rate unchanged until September to retain some policy space for weathering uncertainties in the global economy and stabilizing the country's currency during the expected peak inflow of repatriated capital under the government's tax amnesty program.
The central bank unexpectedly kept its current reference rate at 6.50 percent and the seven-day reverse repurchase rate — which will become the new benchmark rate next month — at 5.25 percent on Thursday (21/07) after a series of cuts that have seen the benchmark decline 100 basis points since the beginning of the year.
"The decision was initially puzzling after last month's heavy concern on growth due to inflation, especially with the fulfillment of determinants for further easing," Bank Danamon Indonesia economists Anton Hendranata and Wisnu Wardana said in a recent statement.
Senior Bank Indonesia officials are more comfortable with keeping rates steady as policy transmission has improved — judging by annual loan growth that is projected to have accelerated by 8.9 percent in June from 8.3 percent in May, which in turn increased from 8 percent in April, the economists said.
Officials also see growing uncertainty in global economic growth after Britain decided to leave the European Union, which caused the central bank to adopt a wait-and-see approach until the full impact this may have on the Indonesian economy becomes clearer, Anton and Wisnu wrote.
The economists expect Bank Indonesia to use its interest rate "ammunition" twice in the fourth quarter this year, with 25 basis point cuts each time, to keep the currency in check following massive demand for Indonesia's high-yielding bonds.
Compared to its peers in the region, Indonesia's 10-year bond real return reached 3.6 percent per year, compared to Singapore's 2.7 percent and the United States' 0.6 percent, according to Danamon's calculations.
According to central bank data, the rupiah traded at 13,102 against the US dollar on Friday, having strengthened by 5 percent against the greenback so far this year.
While a strong currency helps businesses and customers to source cheaper goods and services from abroad, it hurts exporters, who see demand for their commodities come under pressure amid a weak global economy.
Tags: Keywords: