(Bloomberg) -- Indonesia’s central bank held its benchmark interest rate steady as expected, signaling that it will wait until the fourth quarter before pivoting when the Federal Reserve has gotten its easing well under way.
Bank Indonesia left the BI-Rate unchanged for a fourth straight month at 6.25% Wednesday, the highest level since the benchmark was introduced in 2016. That’s in line with the forecast of 34 of the 36 economists surveyed by Bloomberg, with the rest expecting a quarter-point cut.
“In the third quarter, our focus is to further strengthen the stability of the rupiah,” Governor Perry Warjiyo told reporters in a briefing in Jakarta. He reiterated that the room for rate cuts will likely open up towards the end of the year.
By then, the Fed will likely have kicked off its easing cycle. Bank Indonesia expects the Fed to deliver two quarter-point rate cuts this year starting in September, and ease by another 75 basis points in the first half of 2025.
The rupiah pared an earlier loss against the greenback following the decision to close 0.3% weaker at 15,485 per dollar. The yield on five-year bonds erased an earlier two basis point decline to close little changed at 6.5%.
“This is not that dovish by Governor Warjiyo’s standards,” said Satria Sambijantoro, head of research at PT Bahana Sekuritas. “BI sees little need to cut rates in the near-term given the still robust credit growth, and seems comfortable in keeping ample yield differentials.”
While the dollar is expected to keep weakening due to Fed rate cut bets and falling US Treasury yields, Bank Indonesia remains vigilant as geopolitical issues may stoke volatility, Warjiyo said.
The central bank also sees that a stronger rupiah should keep prices steady and support businesses. Policymakers vowed to keep using monetary and macroprudential measures to maintain currency stability and support economic growth against the backdrop of “still high risk” of global financial market uncertainty.
What Bloomberg Economics Says...
Two out of three boxes are already ticked in favor of a cut — the policy rate is already considered by BI to be too tight for domestic demand, and it sees inflation on track to remain within the 1.5%-3.5% target. The last hurdle is a convincing rupiah recovery — and this is starting to come into view with the Federal Reserve now looking close to beginning its own rate cuts.
— Tamara Mast Henderson, economist
For the full note, click here
The Indonesian rupiah has rallied 5% this month to be among the top performers in Asia as investors plowed $1.5 billion into the nation’s bond market in August, according to data compiled by Bloomberg. However, Bank Indonesia may be wary about premature easing even as inflation slows further. A surprise drop in the trade surplus last month could be a sign that the currency’s foothold is still vulnerable going forward.
Bank Indonesia can afford to be patient. Despite borrowing costs at multi-year highs, credit growth was a healthy 12.4% in July and is set to end the year at the upper end of the 10%-12% goal. The central bank also expects inflation to remain within the 1.5%-3.5% target band, while maintaining its forecast for Indonesia’s economy to grow by 4.7%-5.5% this year.
Foreign flows have also returned in force to Indonesian assets, both into its short-term, high-yield papers, but also to government bonds. That’s prompted Bank Indonesia to pare back premiums and the auction frequency of its so-called SRBI rupiah securities.
SRBI will remain a tool to keep luring inflows, especially when volatility ramps up again, the governor said. The central bank will ensure its yields remain attractive versus 2-year US Treasuries, as the 10-year paper will likely stay elevated due to US budget needs.
“BI appears to continue to prioritize rupiah stability as markets keep waiting for the Fed easing cycle to begin,” said Alan Lau, a strategist at Malayan Banking Bhd in Singapore. “In some respects, their words today we believe is supportive for the rupiah as BI itself may not move ahead of the Fed.”
--With assistance from Eko Listiyorini, Shinjini Datta and Matthew Burgess.
(Updates throughout with more comments from BI governor.)
©2024 Bloomberg L.P.
