Bank Indonesia keeps key interest rate on hold at 6 pct

Bank Indonesia kept the 7-day reverse repo rate on hold at 6 percent, as was anticipated. Given the recent strength in the IDR and benign inflation readings, there was little impetus for the central bank to tighten monetary policy today, noted ANZ in a research report.

Today’s decision is the third consecutive month the central bank has kept its policy rate on hold. A hike today was unlikely given the recent strength in the Indonesian rupiah, which has appreciated by over 2 percent against the USD year-to-date. Inflation also stays in check – headline inflation came in at 2.82 percent year-on-year in January, the lower end of BI’s 2.5 to 4.5 percent target band, while core inflation remained at 3.06 percent year-on-year.

During the press conference, Governor Perry Warjiyo reiterated that the central bank’s focus in on safeguarding external resiliency, keeping the current account deficit at safe levels and ensuring the attractiveness of local assets.

However, the BI is unlikely to be unwinding its rate hikes any time soon given the recent trends in the current account. The deficit broadened further in the fourth quarter to 3.56 percent of GDP, the highest since June 2014. In the meantime, monthly trade data indicated the trade deficit widening from USD 1.03 billion in December to USD 1.16 billion in January.

In terms of growth, the BI governor noted that the central bank is considering accommodative macro-prudential measures to underpin economic activity, though he declined to provide details. BI continues to see growth at 5 percent to 5.4 percent and inflation at 2.5 to 4.5 percent in 2019.

“Overall, we acknowledge that the risks to our base case for a 25bp hike in BI’s policy rate this year, which is contingent on the US Fed resuming tightening, are weighted to the downside. As things stand, BI does not think the US Fed rate hiking cycle is over just yet”, added ANZ.