Visitors seen leaving the headquarters of Bank Indonesia in Central Jakarta on Jan. 17, 2019. (Reuters Photo/Willy Kurniawan)

Bank Indonesia Holds Key Rate, Says Current Level 'Near Peak'

BY : NILUFAR RIZKI & MAIKEL JEFRIANDO

JANUARY 17, 2019

Jakarta. Bank Indonesia held its key rate unchanged on Thursday and the governor indicated that its cycle of aggressive tightening in 2018 was "near its peak," thanks to "dovish" recent signals from the United States Federal Reserve.

The central bank held the seven-day reverse repurchase rate at 6.00 percent, as predicted by all 20 analysts in a Reuters poll.

The bank raised the rate six times by a total of 175 basis points between May and November last year to combat capital outflows and contain a yawning current-account gap that contributed to the rupiah sliding to its weakest since 1998.

The currency has rebounded since, but in recent days there has been a renewed bout of weakness amid concern over China's economy and Indonesia's record 2018 trade deficit of $8.57 billion.

Bank Indonesia Governor Perry Warjiyo repeated his comment on Wednesday that the current level of the benchmark rate was "near its peak," and he noted market expectations that the Fed will have just one hike or none this year, compared with 2018's four.

"We will continue to direct our interest rate policy as part of efforts to bring down the current-account deficit and maintain the yield of domestic financial assets," Perry told a news conference.

Any Hikes Ahead?

Given Perry's "dovish tilt" and the rupiah's recent stability, Bank Indonesia should "remain dovish, unless we see a stark reversal in the currency's trajectory in the next few months," ING economist Nicholas Mapa said.

Some other continue to project rate hikes by the central bank.

Natixis Asia economist Trinh Nguyen said she sees one 25 basis point hike by Bank Indonesia in 2019, as with the Fed, while Capital Economics sees two Indonesian hikes if the US stock market falls sharply.

Southeast Asia's largest economy has been among the most vulnerable to capital outflows because it runs a sizable current-account deficit that is not covered by foreign direct investment. Foreigners own a large portion of its sovereign bonds.

The current-account gap in the third quarter was the largest in four years, at $8.8 billion, or 3.37 percent of gross domestic product.

The governor said the fourth-quarter deficit was seen around $8.8 billion, but capital inflows at the end of last year had helped Indonesia's balance of payments to post a surplus of between $4 billion and $5 billion.

The central bank would also optimize its policy mix with other authorities to bring the gap to 2.5 percent for 2019, Perry said.

Bank Indonesia said economic growth this year would be higher than in 2018, in a range of 5.0 percent to 5.4 percent, despite its rate hikes. The central bank also remained confident that inflation would stay within its 2.5 percent to 4.5 percent target range. The annual rate was 3.13 percent in December.

Reuters

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