Indonesia Discounts Need for Rate Hikes Amid Global Turmoil

Indonesia left its benchmark interest rate unchanged for a second straight month and signaled a longer pause, as it weighs other tools to insulate the economy from the turbulence in the global banking system.

(Bloomberg) — Indonesia left its benchmark interest rate unchanged for a second straight month and signaled a longer pause, as it weighs other tools to insulate the economy from the turbulence in the global banking system.

Bank Indonesia kept the seven-day reverse repurchase rate at 5.75% on Thursday, as seen by 26 of 28 economists surveyed by Bloomberg. Two had expected the authority to add another quarter-point hike to its 225 basis points of increases since August.

The rupiah pared losses, closing 0.1% weaker against the dollar after sinking as much as 0.55% earlier in the day. The benchmark stock index fell 0.94%.

The decision is in line with BI’s stance that there’s no need to raise interest rates further to tame inflation, Governor Perry Warjiyo said in a briefing on Thursday. The core gauge closely-monitored by policymakers is set to stay within the 2%-4% target corridor in the first half of 2023. Ramadan festivities could stoke prices through next month, but headline inflation would return to target by September, he said.

Risks, however, are building up on the currency front as markets anticipate the Federal Reserve’s move next week amid concerns over stubborn inflation and the resilience of the global financial system after a mid-sized banking stress in the US earlier this week followed by woes at Credit Suisse Group AG.

Bank Indonesia Chief Assures Nation’s Lenders are Strong, Stable

The rupiah has become the worst performer among Asian currencies this month, raising the risk of imported inflation. The currency has given up much of its gains this year, as funds pulled out from risky assets.

What Bloomberg Economics Says…

“The currency is one of the strongest performers in emerging markets and the Asian region year-to-date. We still see a rate cut as its most likely next move, possibly before year-end, if the rupiah remains resilient.”

— Tamara Mast Henderson, Asean economist

For the full note, click here

Bank Indonesia raised its estimate for the Fed’s peak rate to 5.5%, saying policymakers will likely be spurred to action by persistently high prices and a tight labor market. Financial regulators’ intervention should also be enough to stabilize US’ troubled lenders, Warjiyo said.

Despite this, Bank Indonesia need not move in tandem with the Fed, the governor said. 

“BI’s interest rate policy is based on expectations and projections of inflation, balanced with economic growth,” he said. The current rate level is “enough.”

Policymakers will instead rely on Operation Twist-style interventions in the short-end of the bond market, as well as its new FX term deposit facility for exporters to lure more dollar inflows. Foreign reserves, which climbed to a one-year high last month, should also get a boost as China’s reopening supports Indonesia’s export growth and pads the trade surplus.

“We maintain our call for an extended rate pause by BI,” said Krystal Tan, an economist at Australia & New Zealand Banking Group. “We concur with BI’s view that inflationary pressures are manageable and do not warrant further rate hikes.”

–With assistance from Norman Harsono, Eko Listiyorini, Tomoko Sato and Soraya Permatasari.

(Updates throughout with BI and Fed policy outlook)

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