Indonesia: 4.75% Jakarta holds rate to guard against capital outflows

JAKARTA • Indonesia’s central bank, Bank Indonesia (BI), kept its benchmark interest rate unchanged at its first meeting this year with policymakers remaining on guard against the risk of capital outflows.

Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.75 per cent yesterday, as forecast by economists. The prospect of further policy tightening in the United States is putting pressure on emerging-market currencies, including Indonesia’s rupiah. Six rate cuts last year and subdued inflation are giving policymakers in Indonesia room to pause as the World Bank forecasts faster growth this year and next.

But many analysts argue that room for more rate cuts has shrunk with rising global uncertainty and more worries that US rate hikes by the Federal Reserve will pull more money out of emerging markets.

“Should BI lower interest rates further as the Fed begins to lift up short-term rates beginning in Q2 2017, the risk premium may not be enough to retain flows in Indonesia,” said Trinh Nguyen, economist at Natixis. “With growth and inflation accelerating, there isn’t much impetus for BI to ease this year.”

ANZ said it expects BI to keep the policy rate unchanged “for an extended period of time. Even if growth undershoots, whether any monetary easing will take place in 2017 will depend crucially on the actual inflation trajectory”.

BI yesterday said it will watch the direction of US fiscal and trade policy under Mr Donald Trump, who will be sworn in as president today.

BI aims to keep inflation at 3 per cent to 5 per cent this year. Consumer-price growth has been under 5 per cent for more than a year.