In­done­sia cen­tral bank holds rates, stands guard on out­flows

The Pak Banker - - FRONT PAGE -

In­done­sia's cen­tral bank kept its key pol­icy rate un­changed for the sixth straight meet­ing, as ex­pected, say­ing the fo­cus of mon­e­tary pol­icy was main­tain­ing the ru­piah's sta­bil­ity.

South­east Asia's largest econ­omy is grow­ing at its weak­est pace in six years, but the cen­tral bank has to bal­ance loos­en­ing pol­icy to spur growth against fi­nan­cial mar­ket volatil­ity and the risk of cap­i­tal out­flows when US in­ter­est rates rise.

Bank In­done­sia (BI) kept its pol­icy rate at 7.5 per cent, where it has been since Fe­bru­ary's 25ba­sis-point cut. The overnight de­posit fa­cil­ity and lend­ing fa­cil­ity rates were also left at 5.5 per cent and 8 per cent, re­spec­tively.

"We are keep­ing a bal­ance in main­tain­ing sta­bil­ity and push­ing for eco­nomic growth," said deputy gover­nor Perry War­jiyo, adding that BI will re­spond to slower growth with an ac­com­moda­tive pol­icy mix.

The ru­piah, emerg­ing Asia's sec­ond-worst per­former, is "un­der­val­ued", cen­tral bank gover­nor Agus Mar­to­war­dojo re­it­er­ated. It slipped to 13,848 per dol­lar on Tues­day.

BI said it had been "des­per­ately de­fend­ing" the ru­piah and will con­tinue to main­tain its pres­ence in for­eign ex­change and bonds mar­ket. Its for­eign ex­change re­serves stood at an "ad­e­quate" $107.6 bil­lion (Dh395.21 bil­lion) at end-July.

The cen­tral bank said it was op­ti­mis­ing its mon­e­tary oper­a­tions by mop­ping up short-term ex­cess liq­uid­ity in the mar­ket so that traders can't use it to spec­u­late against the ru­piah.

It will con­duct a for­eign ex­change swap with banks once a week in­stead of twice and will in­crease is­suance of 9-month and 12-month Bank In­done­sia cer­tifi­cates.

For those buy­ing more than $25,000 over the counter, BI will also re­quire more doc­u­ments, rep­re­sent­ing a tight­en­ing of ex­ist­ing reg­u­la­tion.

Weaker-than-ex­pected trade data ear­lier on Tues­day pro­vided more ev­i­dence of slug­gish growth at the start of the third quar­ter as In­done­sia's trade sur­plus sharply widened. Ex­ports in July slumped 19 per cent to a three-year low, while im­ports tum­bled 28 per cent, the big­gest fall since 2009.

Econ­o­mists say the cen­tral bank has room to cut rates later this year as in­fla­tion cools, but ad­just­ments will be grad­ual.

"The worst of the mar­ket re­ac­tion to China's "de­val­u­a­tion" ap­pears to be over, but the ru­piah is likely to come un­der fur­ther down­ward pres­sure as the Fed starts tight­en­ing mon­e­tary pol­icy," Gareth Leather, Asia economist at Cap­i­tal Eco­nom­ics said. ING Fi­nan­cial Mar­kets in a re­port ahead of the rate an­nounce­ment forecast a com­bined rate cut of 250 ba­sis points from De­cem­ber to end-2016, bring­ing the rate to 5 per cent.

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