© Reuters. Bank Indonesia’s logo is seen at Bank Indonesia headquarters in Jakarta, Indonesia, September 2, 2020. REUTERS/Ajeng Dinar Ulfiana/File photo
By Devayani Sathyan
BENGALURU (Reuters) – Bank Indonesia (BI) will keep its key interest rate unchanged at 5.75% on Thursday and for the rest of the year to maintain the stability of the rupiah currency, similar to most of its Asian peers, as inflation continues to ease, a Reuters poll found.
Inflation, at 3.27% in August, has stayed below the central bank’s 2-4% target range over the past few months, but rising U.S. Treasury yields and concerns over an economic slowdown in China have put pressure on the rupiah.
BI was expected to keep rates on hold to support the currency, down 1.3% this year.
All 31 economists in a Sept. 8-18 Reuters poll expected the central bank to maintain its benchmark seven-day reverse repurchase rate at 5.75% at the conclusion of its two-day policy meeting on Sept. 21.
“Bank Indonesia would prefer to keep rates on hold while weighing global uncertainties versus domestic considerations. So while inflation is still within its own official target, I think rupiah stability will be paramount,” said Radhika Rao, senior economist at DBS.
“BI are trying to balance FX stability risks vis-a-vis domestic considerations, and at this point they would lean more towards FX stability especially because trade surpluses are narrowing.”
With the U.S. Federal Reserve expected to continue its ‘higher for longer’ mantra, the rupiah was predicted to weaken further or trade in a tight range, likely keeping rate cut expectations at bay for now.
Among economists who had a long-term view, forecasts were largely unchanged from an August poll, and more than 60% – 18 of 28 – forecast BI to keep rates on hold at 5.75% until year-end.
Nine predicted at least one 25 basis points cut by then, and one saw rates at 6.0%.
The median forecast showed a 25-basis-point rate cut to 5.50% in the first quarter of 2024.
“We are expecting BI to follow the fed funds rate trajectory first. BI is going to be more reactive instead of proactive in shifting gear to the rate cut cycle,” said Irman Faiz, economist at Bank Danamon.
A total of 75 basis points in rate cuts to 5.00% were forecast by end-2024, less than the 100 basis points in cuts expected in the previous survey.