Its Hands Tied, Bank Indonesia Keeps Rate Steady at 7.50%
Jakarta. Bank Indonesia kept its benchmark interest rate steady at 7.50 percent at a policy meeting on Thursday, as a falling rupiah and accelerating inflation continue to weigh on the economy.
“The decision was in line with the effort to keep inflation at the target of 4 percent plus or minus 1 percent in 2015 and 2016, as well as directing the current-account deficit to a healthier level in the range of 2.5 percent to 3 percent of GDP in the medium term,” the central bank said in a statement.
Economists agreed that there was no room for BI to ease its monetary policy.
The central bank highlighted concern over the global economy, citing lower-than-expected growth in economic powerhouses the United States and China, and uncertainty over Greece’s debt talks.
“Rising global risks may lead to risk-off situation and caused a capital flight and affect the rupiah to weaken further,” said Dian Ayu Yustina, an economist with Bank Danamon Indonesia in Jakarta.
She lauded the central bank’s revised policies on foreign exchange transactions, including allowing companies to have cross-currency swaps, which she said would “mitigate currency risks for companies that are looking to hedge their US dollar exposure.”
The rupiah is Asia’s worst-performing currency this year. It gained 0.5 percent to 13,302 to the US dollar on Thursday, but is still down 6.9 percent for the year. The country’s benchmark stock index was virtually flat, declining by 0.01 percent to 4,945.5 at Thursday’s close.
The policy rate announcement came in the afternoon after Indonesia Stock Exchange had closed.
Tough but welcome decision
Gundy Cahyadi, an economist at Singapore’s DBS Bank, acknowledged that it was a tough time for BI to refrain from loosening monetary policy amid slowing economic growth.
“Volatility in the financial markets means their hands are tight,” he said.
He agreed the central bank should not “try and spur growth” by cutting interest rates at a time when volatility is haunting the financial market.
Dinno Indiano, the president director of BNI Syariah, the shariah-compliant arm of state lender Bank Negara Indonesia, said BI’s decision was an “OK call” as stakeholders awaited signs of upward movement in the economy.
“Everybody is waiting for the engine to move. Many people said we need to wait and see how the economy would perform after Idul Fitri,” the end of the holy month of Ramadan, which falls on July 18 this year.
“If government spending and infrastructure development still don’t pick up after that, then we need to have an introspection,” Dinno said.
“The decision depends on external factors. It’s very dilemmatic for Bank Indonesia.”
Lana Soelistianingsih, an economist at the University of Indonesia, said “it might be the best decision for now” to hold the rate steady to combat inflation and maintain the attractiveness of portfolio assets to help prop up the rupiah.
But she said the central bank would “need to review it in September,” once it became clearer whether the US Federal Reserve would increase its benchmark interest rate.
BI predicts gross domestic product growth of 5 to 5.4 percent for the full year.
The post Its Hands Tied, Bank Indonesia Keeps Rate Steady at 7.50% appeared first on The Jakarta Globe.