Indonesia holds rates steady to safeguard weak currency

Bloomberg

Indonesia’s central bank left its key interest rate unchanged on Wednesday to shore up support for the sagging currency, and called for close coordination with government to revive Southeast Asia’s largest economy.
After 100 basis points of easing so far this year, Bank Indonesia kept the seven-day reverse repurchase rate at 4% Wednesday, as expected by 20 of 25 economists in a Bloomberg survey. The other five predicted a 25 basis-point cut.
Bank Indonesia will “continue strengthening the synergy in monetary expansion with accelerated government fiscal stimulus to support the national economic recovery,” Governor Perry Warjiyo said at a briefing in Jakarta.
The central bank is trying to balance the need for more stimulus with risks that the currency may weaken further if it continues lowering rates. The pandemic pushed Southeast Asia’s largest economy to its first contraction in more than 20 years in the second quarter, while the rupiah is down more than 6% against the dollar since the start of the year, making it the worst performer in Asia.
The currency maintained gains of 0.5% against the dollar after the rate decision, snapping eight days of losses. The yield on benchmark 10-year government bonds extended its decline to 3 basis points at 6.717%, its lowest level since March 5. The nation’s benchmark stock index closed 0.4% lower, its first
decline in seven sessions.
“It appears the main reason Bank Indonesia didn’t cut rates is weakness of the rupiah,” Capital Economics economist Alex Holmes wrote in a note after the decision. “A high level of foreign currency debt in the country means the central bank keeps a very close eye on the strength of the rupiah.”
There’s still pressure to cut rates as growth risks mount. The government last week revised down its 2020 economic growth forecast to a range of -1.1% to 0.2%. At the same time, inflation remains below the lower end of the central bank’s target band and the current-account deficit is improving as the trade surplus widens, helping to relieve
pressure on the exchange rate.
Aside from rate cuts, the central bank has been expanding its toolkit this year to support the economy. It has reduced the reserve ratio requirement for banks to boost lending and increased its purchases of government bonds to stabilise markets and finance fiscal stimulus. Warjiyo said the bank is committed to its efforts to maintain enough liquidity in the financial system.
“We sense that monetary policy makers are comfortable with the fact that the latest leading indicators are showing signs of recovery, although still below pre-pandemic levels,” said Wisnu Wardana, an economist at Bank Danamon Indonesia in Jakarta. “We think unlocking the shift in consumer behaviour, not just on what but how or when they spend, would be key to constructing effective policy measures.”