By Ying Xian Wong
Indonesia's central bank stood pat at its July policy meeting, holding rates steady again as it keeps a watchful eye on the rupiah.
Bank Indonesia kept its benchmark seven-day reverse repo rate at 6.25% on Wednesday, as widely anticipated. All seven economists polled by The Wall Street Journal had expected the decision. The central bank also held its overnight deposit facility rate at 5.50% and its lending facility rate at 7.0%.
The decision is consistent with the bank's stance on ensuring inflation sticks to the target range of 1.5% to 3.5% this year and the next, Bank Indonesia Gov. Perry Warjiyo said at a press conference.
Economists had largely expected the central bank to keep policy settings unchanged, reasoning that it likely wants to see how inflationary and currency pressures play out before making any moves.
Indonesia's economy remains well supported by domestic demand, with growth in 2024 expected to at 4.7% to 5.5%, the governor said. The economy grew 5.05% last year.
Warjiyo also said that Bank Indonesia will continue to strengthen ties between the government's fiscal stimulus and the central bank's macroprudential stimulus to create sustainable growth, especially from the demand side.
The government's spending plans have been a question mark for some economists, raising the prospect of a ballooning budget deficit.
There's concern about the impact the ambitious spending plans of president-elect Prabowo Subianto, who takes office in October, might have on public finances, Capital Economics said in a recent note.
"The incoming government's fiscal bent and key cabinet appointees, especially for the finance portfolio, will be of great interest," DBS senior economist Radhika Rao said.
Bank Indonesia believes that headline and core inflation will remain on target this year, Warjiyo said Wednesday, citing the economy's capacity to meet domestic demand. The central bank's exchange-rate stabilization measures are keeping imported inflation in check, he added.
BI's intervention has helped the rupiah strengthen against the dollar, and it expects a steady trajectory ahead in part due to robust economic data and other tailwinds, the governor said. Officials will continue optimizing monetary instruments to bolster the rupiah's stability, he added.
The performance of the Indonesian currency will be key in determining the start of Bank Indonesia's rate-cutting cycle. The central bank surprised markets with a rate hike in April to steady the rupiah and has held policy settings steady since then.
As is the case with some other central banks in Asia, a lot also hinges on the Federal Reserve.
Barclays economist Brian Tan thinks the risk of another rate hike exists if the rupiah comes under renewed pressure. But there are also "substantial" risks to Barclays's view that BI will only start cutting in the first quarter of next year, he said in a note.
Tan pointed out that historically, the Indonesian central bank "has been able to shift to easing mode quite quickly once currency pressures have abated," which could prove sooner than expected if Fed cuts arrive and weaken the dollar.
Capital Economics highlighted that BI said it continues to see room for rate cuts in the fourth quarter.
"Our forecast is that the Fed will loosen policy in September. If we are right, this could pave the way for BI to cut rates as soon as October," economist Ankita Amajuri said.
Write to Ying Xian Wong at yingxian.wong@wsj.com
(END) Dow Jones Newswires
07-17-24 0524ET
