BI leaves benchmark rate unchanged

JAKARTA: Indonesia’s central bank left its benchmark interest rate unchanged yesterday, as expected, taking a pause in its monetary tightening cycle aimed at bolstering the rupiah, though emphasising it was still ready to support the currency.

Bank Indonesia (BI) held the sevenday reverse repurchase rate at 5.25%, as anticipated by nearly all economists in a Reuters poll.

“We need to emphasise that BI’s policy stance is hawkish,” BI governor Perry Warjiyo said at the monthly policy meeting.

BI had raised the key rate at each of the last three policy meetings, including at an off-cycle one May 30, to shore up the rupiah.

The rupiah was been relatively steady since the last hike, at end-June, though it was still trading near its weakest level in nearly three years is down nearly 6% this year.

Capital Economics said the hold likely represented a pause rather than an end to the tightening cycle, given risks remain around the rupiah.

“We are predicting at least one further rate hike before the end of the year,” said senior economist Gareth Leather.

Right after BI’s announcement, the rupiah remained at 14,430 per dollar but then it slipped to 14,470, its lowest since October 2015.

Jakarta’s main stock index relinquished small gains on the news, dropping 0.4%, while the yield on the benchmark 10-year government bond held at 7.753%.

Last week, Warjiyo told Reuters BI’s rate hikes were needed to ensure Indonesian assets, particularly government bonds, were the most attractive among comparable emerging market peers.

“The current benchmark rate assumes there will be four US interest rate hikes by the Federal Reserve this year, another three next year, and that the yield of US Treasury notes rises to 3.35% at the end of 2018,’’ he said, indicating there would be no more hikes unless these assumptions change.

The governor yesterday maintained his outlook for US hikes.

“BI will continue efforts to make Indonesian financial market more attractive, not only by addressing yields, interest rates, but also other aspects,” Warjiyo said, adding that “it will try to reduce currency hedging costs and possibly reintroduce BI certificates with nine- and 12-month tenors.’’

The central bank will also work to improve the benchmarking of overnight rate in the money market by launching what Warjiyo calls “Indonia” at the end of July, with rates set by transactions between banks instead of quotations, like at present.

Indonesia’s higher interest rates are likely to dent growth, which has been stuck in recent years at about 5% a year.

But Warjiyo said growth should remain well supported by consumption, though he forecast the 2018 pace would be at the bottom of its 5.1-5.5% range, compared to 5.07% last year.