(Bloomberg) — Indonesia’s central bank left borrowing costs unchanged as expected, with policymakers staying focused on shielding the rupiah from vulnerabilities emanating from the US rate outlook.
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Bank Indonesia held the benchmark BI-rate at 6% on Wednesday as forecast by all 38 economists in a Bloomberg survey.
“The rupiah’s stability has been maintained,” BI Governor Perry Warjiyo told reporters Wednesday. “Going forward, the rupiah is predicted to be stable with a tendency to strengthen supported by BI’s stabilization measures,” he reiterated.
Keeping the rate at the highest level in nearly five years will help support the currency, which has slipped about 2% against the dollar so far this year. With BI sticking to its key mandate of preserving the rupiah’s stability, in turn helping mitigate imported inflation, the markets will turn their focus to this week’s next central bank decision from the US.
The Federal Reserve will announce its rate decision and economic forecasts at 2 p.m. in Washington, with traders watching for the latest rate outlook from the US. That will cap the week that also saw the Bank of Japan ending the world’s last negative interest rate after almost 17 years.
Warjiyo and his board are cautious about easing rates too soon amid the risk of capital outflows, which would exert pressure on the local currency, especially if the Fed waits longer than expected to cut interest rates. Bank Indonesia expects the Fed’s fund rate to decrease in the second half of this year.
Indonesia’s debt market has seen foreign fund outflows intensifying this month, with investors on the sidelines due to concerns over domestic politics and uncertainty surrounding fiscal policy. Banks’ unwinding of government bonds has prompted monetary authorities to step in with purchases to stabilize yields.
Sluggish commodity exports are also undermining Indonesia’s dollar war chest, which has dropped by more than $2 billion as of February. On the inflation front, Bank Indonesia and the government still have to tamp down food prices to ensure headline inflation stays within the 1.5%-3.5% corridor this year.
The central bank retained its growth forecast for Southeast Asia’s largest economy at 4.7%-5.5% this year, amid healthy credit demand.
Bank lending grew by over 11% in February, in line with the 10%-12% target this year — a sign of ample liquidity in the financial system, as well as strong household and business activity, Warjiyo said.
–With assistance from Norman Harsono and Claire Jiao.
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