Central Bank Holds Rates, Points to Some Encouraging Signs


OCTOBER 19, 2017

Jakarta. Indonesia's central bank, which unexpectedly cut rates in the past two months, on Thursday (19/10) held the benchmark unchanged and said Southeast Asia's biggest economy should grow better than initially expected and that earlier trims were feeding through.

Bank Indonesia's (BI) board of governors said economic growth this year would remain within its 5.0-5.4 percent forecast but be supported by an improved performance of trade, hospitality and manufacturing.

The rates decision was consistent with maintaining inflation and rupiah exchange rate stability, BI said, noting that the central bank would also continue to monitor global risks, such as actions by the US Federal Reserve as well as geopolitical uncertainties in Europe and on the Korean peninsula.

BI kept the seven-day reverse repurchase rate at 4.25 percent as expected, following a total of 50 basis points cuts in August and September.

In 2016, the benchmark rate was cut six times, by a total of 150 basis points.

Previous rate cuts were continuing to "transmit" through to banking deposit and loan rates, BI official Dody Budi Waluyo told reporters.

The central bank's stance will remain neutral, he said.

Gareth Leather, senior Asia economist at Capital Economics, said with inflation under control and growth struggling, there was still scope for easing.

"Barring any sudden change in rhetoric, we are sticking with our view that the central bank will cut interest rates again soon, possibly later this year, or more likely in early 2018," Leather said in a note.

Limit on Cutting

Some analysts have warned, however, there is a limit to how low rates can go without undermining the rupiah.

The rupiah dropped by as much as 2 percent in the seven trading sessions following the September rate cut, as the US dollar strengthened broadly against emerging markets' currencies on President Donald Trump's tax plan and increased expectation the Fed will hike rates in December.

Between Sept. 22 and Oct. 17, foreign holdings of Indonesian government bonds dropped by around 18 trillion rupiah ($1.33 billion), finance ministry data showed.

In recent years, Indonesia has struggled to lift its economic growth rate above 5 percent. In the second quarter, the economy grew 5.01 percent from a year earlier, the same as in the previous quarter, blunted by weaker than expected household consumption, the biggest contributor to Indonesia's gross domestic product.

Third quarter GDP data, due in early November, is expected to be better than the previous quarter, Waluyo said.

Lending has been expanding by less than 10 percent a year since the beginning of 2016. Loan growth in August stood at 8.26 percent.