As anticipated, Indonesia’s central bank has opted to maintain its current interest rates. The bank stated that the existing rates effectively manage inflation and concurrently emphasized its commitment to enhancing the stability of the rupiah currency.
Governor Perry Warjiyo of Bank Indonesia (BI) revealed a strategy involving introducing rupiah-denominated securities to attract foreign portfolio capital. These securities will utilize government bonds held by BI as their foundational asset, serving as an innovative monetary approach.
Bank Indonesia maintains its interest rates
In its seventh consecutive monthly policy review, Bank Indonesia (BI) opted to maintain the benchmark 7-day reverse repurchase rate at 5.75%, an action widely anticipated by surveyed economists. Similarly, BI left its other primary rates unchanged.
BI’s efforts have revolved around achieving a delicate equilibrium among objectives: upholding currency stability, curbing inflation, and sustaining growth momentum within Southeast Asia’s largest economy. This approach becomes crucial as export figures decline amidst softening commodity prices.
Amidst debates regarding potential rate cuts to boost growth following an earlier-than-expected cooling of inflation within its target range, people suggest that additional tightening might be necessary to prevent capital outflow.
Governor Warjiyo stated that safeguarding the rupiah is a fundamental strategy to shield the domestic economy, inflation, and growth from the potential repercussions of global developments. The focus lies on stabilizing the exchange rate via interventions, primarily through actions in the spot and domestic non-deliverable forward markets, along with using new securities.
Warjiyo further outlined BI’s plan to introduce Bank Indonesia Rupiah Securities backed by over 1,000 trillion government bonds. These securities will be offered with 6-, 9-, and 12-month maturities from September 15. This novel instrument will replace BI’s reverse repo operations of corresponding tenors, also allowing trading on the secondary market.
With this new approach, the bank will shift from the ‘Operation Twist’ method, which involves selling short-term government bonds while purchasing long-term bonds to stabilize yields and the rupiah. Ahead of the announcement, the rupiah demonstrated a 0.3% increase against the U.S. dollar, and it maintained stability after the rate decision was revealed.
Indonesia’s economy has been under pressure
Although the rupiah has shown a year-to-date increase of approximately 2%, it has encountered pressure, much like bonds, due to escalating U.S. Treasury yields and China’s economic fragility. While Indonesia’s second-quarter growth surpassed expectations due to heightened consumption, the outlook for the latter part of 2023 appears grim due to declining exports and the dampening effect of an upcoming general election in the early months of the following year, which has hindered investment.
In July, inflation decelerated to 3.08%, positioning it around the midpoint of the central bank’s targeted range of 2% to 4%.
Radhika Rao, an economist at DBS Bank, noted that Bank Indonesia preferred a combined strategy of intervention efforts and measures to attract more dollar inflows. This approach was adopted to address the pressing challenges posed by currency depreciation. Rao referred to the rate decision as a balanced approach, striving to harmonize stability and inflation considerations.
Meanwhile, BI upheld its economic growth projection 2023 within the spectrum of 4.5% to 5.3%. The bank anticipated inflation to settle at 2.9% by the year’s end and remain within the target range of 1.5% to 3.5% in 2024.
Shivaan Tandon from Capital Economics expressed conviction that, given the anticipation of inflation remaining well within the set target and the elevated downside risks to the economic outlook, interest rate reductions would likely commence in October. Conversely, experts at Bank Danamon expect BI to sustain a neutral monetary stance unless a surprising development from the Federal Reserve significantly unsettles markets and triggers a pronounced rupiah weakening.