Indonesia holds rates to support recovery with eye on war risks

Bloomberg

Indonesia’s central bank left its policy rate unchanged, seeking to sustain its recovery while keeping a close eye on core inflation and the impacts from the war in Ukraine on the global economy.
Bank Indonesia kept the seven-day reverse repurchase rate at 3.5% on Thursday, as predicted by all 29 economists in a Bloomberg survey. The rate has been at a record low since February 2021.
“We will maintain a low policy rate of 3.5% until there are signs of fundamental inflationary pressures,” Governor Perry Warjiyo said in a briefing, adding that the central bank will look through the current round of food and oil price shocks. Fiscal interventions, such as subsidies and price controls, are better suited to responding to supply-driven pressures, he said.
“I need to emphasise that monetary policy responds to a fundamental increase in inflation which is seen in core inflation,” Warjiyo said. “We don’t respond directly to the increase in volatile food and administered prices inflation.”
The decision to stand pat underscores the central bank’s focus on firming a robust recovery from the pandemic for Southeast Asia’s biggest economy. It comes as shocks from Russia’s invasion of Ukraine reverberate through the global economy and after the Federal Reserve raised its benchmark rate, which Warjiyo said on Thursday he expects it to hike six more times this year.
Indonesia’s rupiah has been among the least depreciated currencies in Asia as the US dollar strengthens, taking some pressure off the central bank to act, as a surge in commodities prices has buoyed export earnings.
The rupiah was up about 0.1% against the US dollar after the decision, while the benchmark stock index traded down 0.4% as of 3:58 pm local time after earlier hitting a record.
“Economic fundamentals were well supported with the domestic recovery on track. Higher commodity prices are also supportive of Indonesia’s current account,” said Jeff Ng, senior currency analyst at MUFG Bank in Singapore. “Higher inflation by the second half of this year may trigger Bank Indonesia’s rate hikes then.”
The central bank has been on watch for imported inflation pressures while consumer prices still hover at the lower end of its 2%-4% target, which it reiterated on Thursday. Prices of some domestic foods, such as cooking oil and soybeans, have gone up despite market intervention by the government. As well, the value-added tax is set to increase to 11% in April, while fuel prices may rise to ease the subsidy strain on the budget.
Warjiyo said on Thursday that the central bank is coordinating with the government to manage the impact of higher global energy prices, and looking to support policies to manage food prices ahead of Ramadan, which starts next month.
Domestic growth remains on track, despite a hit to the global economy from the war in Ukraine, Warjiyo said, repeating the bank’s outlook for 4.7% to 5.5% expansion in gross domestic product this year.
“It’s notable that Bank Indonesia has kept its domestic growth and inflation forecasts unchanged despite the Russia-Ukraine conflict and the surge in commodity prices,” said Krystal Tan, economist at Australia & New Zealand Banking Group Ltd. in Singapore. “With the rupiah resilient and inflation manageable, helped in part by government efforts such as fuel subsidies, we think Bank Indonesia has scope to be patient.”