Bank Indonesia Governor Perry Warjiyo speaks during a press conference at the Bank Indonesia headquarters in Jakarta, Indonesia, December 20, 2018. REUTERS/Willy Kurniawan

Bank Indonesia Holds Rates, but More Tightening Expected in 2019

BY :GAYATRI SUROYO, MAIKEL JEFRIANDO

DECEMBER 20, 2018

Jakarta.  Bank Indonesia kept its benchmark interest rate unchanged as expected on Thursday, though it reasserted that it would act to defend the exchange rate when needed after a fresh wobble in the currency earlier in the day.

At its last 2018 policy review, the central bank held the seven-day reverse repurchase rate at 6.00 percent, matching the expectation of a Reuters poll.

The rate has been raised six times by a total of 175 basis points since May, with the last increase in November, as Bank Indonesia sought to slow capital outflows and put a floor under the rupiah.

The rupiah barely moved after the rate announcement. The currency fell 0.55 percent on Thursday after the United States Federal Reserve raised interest rates by 25 basis points, but supported by Bank Indonesia intervention recouped losses in later trade.

Bank Indonesia Governor Perry Warjiyo said the current level of rates are consistent with efforts to bring the current-account deficit – seen around 3 percent of gross domestic product in 2018 – to a healthier level next year and maintain the attractiveness of domestic assets for foreign investors.

The rate decision also took into account the trend in global interest rates, including the Fed's signal of two rate hikes, instead of three, in 2019.

That outlook means "US Treasury yield will not rise as high as we initially thought," Perry said, explaining that it would spur a "portfolio investment reallocation out of advanced economies to emerging markets."

Pressured Rupiah 

The rupiah has been under pressure for much of this year due to the US monetary tightening, the US-China trade war and Indonesia's widening current-account deficit. It reached levels not seen since 1998, before rebounding last month with the help of a $7.9 billion net inflow in November.

The central bank governor reiterated his expectation of a more stable currency next year. However, he said Bank Indonesia would continue to stabilize the exchange rate to make sure it reflects fundamentals.

Analysts have said Bank Indonesia would likely still have to increase rates next year to counter possible capital outflows, noting several uncertainties in the global market, including the trade war and a possible economic recession in the United States. Gareth Leather, a senior Asia economist at Capital Economics, said Bank Indonesia 's decision to leave rates unchanged was "unlikely to mark the end of the tightening cycle given the likelihood of further falls in the rupiah over the coming year."

But economists predicted a slower pace of rate hikes next year.

"I expect Bank Indonesia to raise its benchmark rate twice [next year], so it won't be as aggressive as this year," said Winang Budoyo, chief economist at Bank Tabungan Negara.

Bank Indonesia earlier cut its 2018 GDP growth outlook to 5.1 percent and 2019 to a range of between 5.0 percent and 5.4 percent, from slightly higher rates. Officials, however, continued to argue that more relaxed banking credit and liquidity rules should cushion the effect of its rate hikes.

The central bank was also confident that it would maintain the inflation rate within its comfort range until the end of next year, Perry said.

Reuters

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