Bank Indonesia Holds Rates, Keeps Tips for Cut in Second Half

February 21, 2024, 04.52 PM | Source: Reuters

ILUSTRASI. Workers leave Bank Indonesia headquarters in Jakarta, Indonesia, September 2, 2020. REUTERS/Ajeng Dinar Ulfiana

MACROECONOMICS - JAKARTA. Indonesia's central bank kept policy rates steady on Wednesday, as expected, and maintained that it would likely have room to cut borrowing costs in the second half of the year, despite market predictions of an earlier easing.

Growth in Southeast Asia's largest economy fell slightly last year amid falling commodity prices, though at 5.1%, it remained one of the fastest among countries in the Group of 20 major economies.

Some economists expect economic growth to remain around that level as last week's presidential and parliamentary elections and the expected smooth transition of power in October affect investment decisions.

Bank Indonesia (BI) left unchanged its benchmark 7-day reverse repurchase rate steady at 6.00%, where it has been since October, saying current levels were consistent with efforts to keep the rupiah currency stable and inflation in check.

The move was widely expected by economists polled by Reuters. A majority of economists in the survey also predicted BI would deliver its first rate cut starting from the next quarter to sustain solid growth levels.

At a press conference after the policy meeting, Governor Perry Warjiyo said BI's baseline scenario remained that its policy pivot would be in the second half, highlighting its expectation for the U.S. central bank to also cut rates in the same period.

"The BI rate for sometime will be kept unchanged. Be patient. Until when? We have already given a hint that the baseline plan is in the second half," Warjiyo said, adding any easing hinges on inflation and movements in the rupiah's exchange rate.

The governor focused his commentary on external factors, arguing that better-than-previously-anticipated global growth would help Indonesia's economic expansion this year, though he also warned of risks from potential supply chain disruption from geopolitical tensions and recession in some countries.

BI kept its 2024 economic growth forecast at a range of 4.7% to 5.5%.

Inflation in Indonesia has stayed within BI's target range since the middle of last year, with the central bank's 250 basis points (bps) in rate hikes between August 2022 to October 2023 keeping price pressures in check.

The rupiah, down about 1.7% against the U.S. dollar so far this year, strengthened by 0.16% following BI's decision.

"With the recent elections laying the ground for stability and policy continuity, the central bank is likely to be focused on the spillover risks from global developments and geopolitics, including Red Sea disruptions, while staying on an extended pause," said DBS economist Radhika Rao.

Markets had cheered the victory of Defence Minister Prabowo Subianto, after so-called quick ballot counts by independent pollsters showed he had won the presidency with nearly 60% of votes.

However, economists and rating agencies have also flagged rising fiscal risks due to costly campaign promises by Prabowo.

Asked about the election outcome, Warjiyo underlined that the central bank is by law independent from the government and that it would work with the incoming administration in accordance with the laws.