Bank Indonesia keeps key rate unchanged at 6%, treading cautiously in its rate-cutting cycle
The decision reverses the dovish signals previously conveyed in earlier meetings
Published Wed, Dec 18, 2024 · 05:49 PM — Updated Wed, Dec 18, 2024 · 06:23 PM
[JAKARTA] Bank Indonesia (BI) kept its benchmark interest rate on Wednesday (Dec 18), aiming to stabilise the rupiah, which has plunged to its lowest point in four months.
The key rate was held steady at 6 per cent, in line with the expectations of 21 economists surveyed by Bloomberg. The overnight deposit facility rate and lending facility rate remain unchanged at 5.25 per cent and 6.75 per cent, respectively.
The central bank has adopted a more hawkish stance, with Governor Perry Warjiyo noting the potential for the Federal Reserve to slow its rate cuts next year.
This signals a shift in BI’s approach, as it will tread carefully with any rate reductions, reversing the dovish signals previously conveyed in earlier meetings.
“We will remain focused on stabilising the rupiah for now. While there is still room for rate cuts, the timing is not right yet,” he said during a briefing.
Warjiyo flagged rising global financial market uncertainty, driven by escalating trade fragmentation caused by the tariff policies of US president-elect Donald Trump, which have heightened risks.
This uncertainty has triggered a flight of global capital to safe-haven assets, including US Treasuries, placing renewed depreciation pressure on emerging market currencies, including the rupiah.
The rupiah fell 6 per cent against the US dollar in the third quarter, breaching the 16,100 mark during Wednesday’s trading session.
In recent weeks, BI has stepped into the foreign exchange market with spot transactions in the secondary market, aiming to halt the rupiah’s further decline. Indonesia’s foreign exchange reserves fell to US$150 billion in November, a decline of US$1 billion compared to the previous month.
Fithra Faisal, senior economist at Samuel Sekuritas, noted that the ongoing strength of the greenback and a global risk-off sentiment are likely to continue to weigh on the rupiah’s performance.
“BI is likely to remain vigilant, using macroprudential tools and interventions in the forex market to stabilise the currency and maintain investor confidence,” Faisal said.
National inflation has slowed to within the central bank’s forecast range of 1.5 to 3.5 per cent.
The central bank remains vigilant about the potential inflationary pressures from the upcoming increase in the value-added tax rate from 11 per cent to 12 per cent, set to take effect on Jan 1.
Warjiyo assured that BI will work closely with the government to ensure inflation stays within the anticipated range.
BI’s forecast for South-east Asia’s largest economy remains unchanged from the previous meeting.
The central bank continues to project gross domestic product (GDP) growth for this year in the range of 4.7 to 5.5 per cent.
Meanwhile, the current account deficit forecast stays unchanged, with expectations ranging from 0.1 to 0.9 per cent of GDP.
Anti-graft investigation
The announcement of rate-meeting results came after Indonesia’s Corruption Eradication Commission or KPK launched an investigation into the central bank over allegations of misusing corporate social responsibility funds.
On Monday, the anti-graft agency searched the headquarters of the monetary authority and named two central bank employees as suspects in the case. The agency announced that Warjiyo would soon be summoned for questioning as a witness.
During the briefing, Warjiyo emphasised BI’s commitment to respecting the legal process and cooperating with law enforcement authorities.
“We will support the enforcement of the law and fully cooperate with KPK,” he said, reassuring the market that the case would not cause any undue concern.
