PREVIEW: Bank Indonesia seen keeping rates on hold this week

15, May. 2019

JAKARTA, NNA – Bank Indonesia is likely to stand pat on monetary policy at its two-day meeting ending Thursday, economists say, in a bid to support growth amid the global slowdown triggered by the U.S.-China trade row.

After raising the key policy rate to 6 percent in November, the central bank left interest rates unchanged for the fifth time at its last meeting in April.

Policymakers raised the rate by a total of 175 basis points from 4.25 percent last year to keep funds from moving out of the emerging economy to U.S. dollar assets amid tightening by the Federal Reserve.

The U.S. central bank’s pause in tightening at the start of 2019 has allowed Indonesia to put rate increases on hold without worrying about the current account deficit.

Bank Central Asia chief economist David Sumual expects interest rates in Indonesia to remain stable for now amid ample liquidity in financial markets, and until the new government is in office.

“The political period in Indonesia also affects Bank Indonesia's policies. Most likely the new policy will come out in October along with a new cabinet in Indonesia,” Sumual said.

The official results of last month’s elections are not due until May 22. Unofficial quick counts indicate incumbent President Joko Widodo will retain power.

Relatively low inflation means Bank Indonesia can stay on hold for now. The year-on-year increase in consumer prices has been under 3 percent in 2019, standing at 2.83 percent in April. That is closer to the lower end of the central bank’s 2.5 percent to 4.5 percent target band.

In April, the bank said its decision to hold rates unchanged was aimed at helping “strengthen the external stability of the national economy.”

At the same time, the bank also “expanded its accommodative policy stance” to stimulate domestic demand.

Among the new measures, the bank will increase available liquidity and support financial markets by boosting its monetary operations strategy, and develop the commercial paper market as an alternative source of short-term funding for the corporate sector. It will also increase the supply of domestic non-deliverable forwards by relaxing the regulations, which is seen as an effort to curb speculative selling of the rupiah in overseas markets.

Going forward, if the Fed resumes rate hikes to unwind some stimulus, Bank Indonesia’s policy stance will be also affected, said Piter Abdullah, Indonesia research director for the Center of Reform on Economics.