By Gayatri Suroyo and Stefanno Sulaiman
JAKARTA (Reuters) – Indonesia’s central bank kept its policy rate unchanged as expected on Wednesday, saying it would remain steady at its current level to keep inflation under control and the rupiah stable until 2025, while eyeing room for easing in the fourth quarter.
The seven-day reverse repurchase rate, known as the Bank Indonesia (BI) rate, was left unchanged at 6.25 percent, the lowest since April, in line with expectations from all 35 economists polled by Reuters. BI also left its other policy rates unchanged.
Governor Perry Warjiyo said the decision ensures that inflation will remain within the target range in 2024 and 2025, and that near-term policy focus will be on strengthening the rupiah and attracting capital inflows.
BI has been focusing on managing rupiah volatility, including intervening in currency and bond markets, and inflation has already been within its target range since the middle of last year.
The rupiah has been on a downward trend this year due to the strength of the US dollar and investor concerns about Jakarta’s fiscal health under the next government, which is due to take office in October.
The currency hit a four-year low last month but has recovered about 2 percent in recent weeks.
The rupiah recorded the biggest gains in emerging Asia on Wednesday as market participants pinned their hopes on early monetary easing from the U.S. Federal Reserve. It rose to 16,090 rupiah after the central bank’s interest rate decision, compared with 16,125 rupiah before the announcement.
Warjiyo said there is a greater chance of the Fed cutting interest rates in November than the central bank had expected in December, which could lead to a stabilization or strengthening of the rupiah and give the central bank more room to cut its policy rate.
Warjiyo said earlier this month that the central bank would consider potentially lowering borrowing costs for Southeast Asia’s largest economy in the fourth quarter.
Asked whether the central bank might also bring forward its outlook for policy easing, he said: “I still see room for the Fed to cut interest rates in the fourth quarter. Even if the Fed is expected to ease sooner, it all depends on the data.”
Permata Bank economist Joshua Pardede maintained his forecast that the central bank would keep rates on hold through 2024 and may cut them in the first quarter of next year.
He added that while inflation remains low, risks were emerging from a possible widening of the domestic budget deficit and growing political uncertainty in Europe and the United States.
“These issues could trigger risk-averse sentiment, restrict capital inflows and jeopardize the stability of the rupiah,” Pardede said in a note.
