JAKARTA: Bank Indonesia (BI) has kept its key interest rate unchanged amid a weak rupiah exchange rate, but the central bank has pinned its hopes on portfolio inflows to lift the currency’s worth.
Following the central bank’s monthly policy meeting in Jakarta on Wednesday (March 19), BI Governor Perry Warjiyo announced in a press conference that the BI Rate remained at 5.75 per cent, which he said was “consistent with the endeavour to maintain inflation” and the “rupiah exchange rate” as well as “to push economic growth”.
“Global uncertainty has increased due to the widening US import tariff policy,” said Perry.
He pointed out that economies including Japan and Europe had suffered a “ripple effect” from the US tariffs, compounded by stagnant domestic demand resulting from low business confidence and slowing exports, which in turn had impacted inflows to emerging countries.
However, the global capital market had begun to see a shift as bond investments were rerouted into emerging markets, albeit only “partially, not yet strongly”, Perry said, before noting that a lot of investment was also going into gold.
“We still believe in Indonesia’s financial instruments, whether they are government bonds, stocks or [BI bonds]; they are fundamentally still attractive, because the economic growth remains high,” said Perry.
“The rupiah, fundamentally, should also have strengthened. It should have strengthened, so the pressures taking place against rupiah were due to technical factors by virtue of global uncertainty,” he added.
The exchange rate of Indonesia’s currency against the greenback has depreciated around 1.7 per cent since the start of the year, according to MarketWatch. BI Senior Deputy Governor Destry Damayanti revealed in the same press briefing that government and BI bonds combined saw a year-to-date (ytd) net inflow of Rp 25 trillion (US$1.5 billion).
Stocks, on the other hand, saw Rp 22 trillion outflows ytd.
“Stocks are very closely linked to economic sentiment [...]. We hope what happened yesterday is temporary, because [it was due to] shocks from global policies,” said Destry, referring to a steep plunge in Indonesia’s stock market on Tuesday.
Some analysts blamed the drop on domestic concerns, including fiscal policy uncertainty, dampening corporate confidence as well as the establishment of Indonesia's new sovereign wealth fund, Danantara, led by ministers and government-affiliated individuals.
Moreover, political concerns around rumours of Finance Minister Sri Mulyani Indrawati’s looming resignation and legislative moves to revise the Indonesian Military (TNI) Law, which some critics argue could undermine democracy, added to the unease in the stock market.
Bahana Sekuritas equity researcher Satria Sambijantoro wrote in an analysis on Wednesday that neither foreign investors nor domestic politics were to blame, as Tuesday’s net foreign sell “was actually small” by IDX Composite standards, and if domestic dynamics were the culprit, then bond yields and the rupiah exchange rate “should have been hit first”.
However, he said the recent market sell-offs were not brought about by global spillovers either, given that most regional equity benchmarks closed in the green on Tuesday.
“Our read here is that the market plunge was triggered by fire-sale in ‘conglomerate stocks’, which recorded heavy selling volume yesterday.
These stocks clocked in the steepest drop in the morning, before the sell-offs spread into blue-chip banks,” said Satria.
Concurring, BCA chief economist David Sumual also attributed Tuesday’s plunge to domestic sell-offs, not global spillover or foreign investors, he told The Jakarta Post on Wednesday.
He expressed surprise at BI avoiding attributing the plunge to domestic circumstances. David said equity sell-offs could negatively impact the rupiah exchange rate if money was taken out of the country.
Since the BI Rate reached a peak of 6.25 per cent last April, the central bank has loosened the monetary policy reins by cutting the interest rate by 25 basis points in September and again in January.
Bank Mandiri chief economist Andry “Asmo” Asmoro predicted that BI would only make one more rate cut this year, the timing of which may depend on the direction of the federal funds rate (FFR), the benchmark interest rate of the United States Federal Reserve, and on the state of the global and domestic financial markets.
“The pressure on emerging market currencies, including the rupiah, will likely persist as the risk of a ‘high for longer’ FFR and global uncertainty remains high. Given these conditions, BI may have limited room to lower the BI Rate further,” wrote Asmo in an analysis on Wednesday.
BI’s decision came about 12 hours before the rate announcement from the US Federal Reserve following its Federal Open Market Committee (FOMC) meeting set for Wednesday at 2pm US Eastern Time.
According to the CME FedWatch tool, interest rate traders saw a 99 per cent chance of the Fed keeping its rate unchanged at 4.25 to 4.5 per cent in the meeting.
BI sees the Fed making just one rate cut this year and believes it “will not be in a hurry” to do so, said Perry. - The Jakarta Post/ANN
