Bank Indonesia (BI), Indonesia’s central bank, held its benchmark interest rate steady at 6% for the third consecutive month. This decision comes as the Indonesian rupiah breached the critical 16,000 per US dollar mark, prompting concerns about currency stability. The move aligns with the forecasts of a majority of economists surveyed, reflecting a cautious approach in the face of global economic uncertainties.
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Rupiah Weakness and Global Uncertainty Drive Policy Stance
BI Governor Perry Warjiyo emphasized that the primary objective of maintaining the current rate is to bolster the rupiah against external pressures. He cited heightened global economic uncertainty stemming from US policy shifts and escalating geopolitical tensions as key factors contributing to the rupiah’s vulnerability. These external headwinds complicate BI’s efforts to stimulate economic growth through an easing cycle.
Warjiyo highlighted the impact of US policy changes, particularly under the then President-elect Donald Trump, on global financial markets. The resulting dollar strength and rising US Treasury yields have significantly constrained BI’s ability to lower interest rates further. The central bank acknowledged its “quite bold” intervention in the foreign exchange market to mitigate the rupiah’s recent decline, underscoring its commitment to currency stability.
Indonesian Rupiah coins and banknotes.
Balancing Currency Stability and Growth Objectives
While the need for currency stability remains paramount, BI also faces pressure to support economic growth. Indonesia’s Q3 GDP growth fell short of expectations, adding to the complex balancing act faced by policymakers. Pantheon Macroeconomics’ senior economist, Miguel Chanco, noted that the recent volatility of the rupiah likely influenced the decision to hold rates steady, despite the impetus for easing measures given the weaker economic performance.
BI Governor Warjiyo affirmed the temporary nature of the current policy stance, reiterating the prioritization of currency stability. Beyond interest rates, the central bank is employing various tools to manage the rupiah and stimulate economic activity. These measures include utilizing rupiah securities to attract foreign investment and incentivizing lending by financial institutions. Warjiyo expressed optimism about the rupiah’s future trajectory, anticipating stabilization and strengthening supported by attractive yields, low inflation, and a positive economic outlook.
Inflation Remains Contained, Supporting Policy Flexibility
Indonesia’s inflation rate continued its downward trend, reaching the lower bound of BI’s target range of 1.5%-3.5%. This benign inflationary environment provides some leeway for the central bank to maneuver in its monetary policy decisions. Warjiyo attributed the low food inflation to increased food supplies and effective price management policies. The government also introduced a fiscal stimulus package aimed at mitigating the potential impact of upcoming value-added tax increases on domestic demand.
Conclusion: Navigating a Challenging Landscape
Bank Indonesia’s decision to hold steady on interest rates reflects a prudent approach to navigating a volatile global economic landscape. The central bank is prioritizing rupiah stability in the face of external pressures while seeking avenues to support economic growth. The combination of monetary policy measures, fiscal stimulus, and contained inflation provides a foundation for navigating these challenges. BI’s commitment to maintaining a stable currency and fostering economic growth will be crucial in the coming months as global uncertainties persist.
