Indonesia central bank leaves rates on hold as it focuses on FX stability

JAKARTA :Indonesia’s central bank left interest rates unchanged on Wednesday, as expected, saying changed global dynamics after the U.S. election meant it had to focus on stabilising the currency, and analysts saw little chance of a near-term rate cut.
Bank Indonesia (BI) kept the benchmark rate steady at 6.00 per cent, as predicted by 25 of 34 analysts polled by Reuters. It also left unchanged overnight deposit and lending rates.
“The focus of monetary policy is directed at strengthening the stability of the rupiah exchange rate from the impact of heightened geopolitical and global economic uncertainty with the political developments in the United States,” Governor Perry Warjiyo told a press conference.
BI had cut rates by 25 bps in September, just ahead of the start of the U.S. Federal Reserve’s rate-cutting cycle.
While BI will persist in evaluating the feasibility of further rate cuts, Warjiyo said the evolving global situation has resulted in BI’s easing capacity becoming “more limited” than previously.
The rupiah has been weakening since early October, though so far remains above lows hit earlier in 2024. The currency, as well as the main stock index, held steady after BI’s decision.
“As expected, BI’s top priority was to maintain the rupiah,” SMBC economist Ryota Abe said.
“We think it is hard for BI to consider a rate cut at the December meeting. The prolonged high interest rates will likely weigh on the economy as its momentum is already slowing.”
Warjiyo said under President-elect Donald Trump, the U.S. could be more inward looking, citing plans for high tariffs on imported products, tax cuts and a wider fiscal deficit, which could limit the Fed’s easing cycle and affect global inflation.
Warjiyo said the rupiah’s recent weakness was due to broad U.S. dollar strength and capital flight to U.S. dollar assets since the election, but said it was manageable and all monetary instruments would be used to support the currency’s stability.
On the domestic front, BI maintained its outlook for economic growth in 2024 in a range of 4.7 per cent to 5.5 per cent, with an improvement in 2025, and expected inflation to remain within its 1.5 per cent to 3.5 per cent target range through to 2025.
Annual growth in Southeast Asia’s largest economy was 4.95 per cent in the third quarter. While the pace remains solid, it was far slower than the 8 per cent rate that new President Prabowo Subianto has said he wants to achieve.
DBS Bank senior economist Radhika Rao said BI had clearly flagged that while the inflation outlook left room for a rate cut, the global uncertainties meant it had to focus on financial stability. She saw receding likelihood of further cuts in the rest of 2024.
However, some economists argued BI should opt for an earlier cut.
Hosianna Situmorang, Bank Danamon’s economist, said BI’s easing window was narrowing at a time when domestic growth prospects were weakening.
“In this context, a timely rate cut in the future by BI would be essential to manage these challenges, support economic expansion and restore consumer confidence,” she said, adding that Bank Danamon was reassessing its BI rates forecast.