Waiting game: People exit the Bank Indonesia headquarters in Jakarta. The central bank will watch the Fed’s policy stance, the strength of the dollar and the movement of US Treasury yields when it assesses its next policy move. — Bloomberg
JAKARTA: Indonesia’s central bank will keep interest rates steady for a while to protect the rupiah from global market volatility, and be patient before weighing any monetary easing, governor Perry Warjiyo says.
“We have to hold our policy rate for a while,” Warjiyo said in an interview with Bloomberg Television’s Francine Lacqua in London.
While Indonesia’s inflation is “very low” and would ordinarily justify a rate cut, the central bank is watchful of volatility triggered by bets of another rate hike by the Federal Reserve (Fed).
“If we only consider the domestic economy, then actually our policy rate needs to be lowered, but I cannot lower our policy rate because of the global spillovers.
“So we have to be patient,” Warjiyo said.
The rupiah pared earlier losses to close little changed against the dollar last Friday.
The yield on the government’s benchmark 10-year notes fell three basis points to 7%.
Indonesia’s rupiah has been among the biggest losers in Asia in the past month as a sell-off swept through emerging market assets amid the threat of elevated interest rates in the United States.
Maintaining currency stability is Bank Indonesia’s main objective, and Warjiyo has cited the dollar’s strength as the reason why the authority has resisted cutting borrowing costs despite favourable inflation and economic conditions.
That’s taken on greater urgency at a time when costlier rice and oil could yet stoke imported price pressures in South-East Asia’s largest economy.
Bank Indonesia will watch the Fed’s policy stance, the strength of the dollar and the movement of US Treasury yields when it assesses its next policy move, Warjiyo said.
Even if the governor and his rate-setting board were to extend the rate pause at the Oct 19 meeting, Indonesia risks reaching rate parity with the United States, should the Fed decide to move by another quarter-point next month.
Bank Indonesia has kept its benchmark interest rate steady at a four-year high of 5.75% since February.
This is because previous rate hikes had successfully brought inflation back to target earlier than expected.
However, that’s weakened investor appetite for Indonesian assets that offer little premium over US notes.
The rupiah dropped 3% last quarter and erased year-to-date gains last week.
Capital flight sent the yield on the benchmark 10-year note past 7%, a level last seen in November and one that had prompted the central bank to buy bonds in the market for the first time since 2022.
Bank Indonesia will maintain its presence in the market to stabilise the rupiah and manage the yield differential between the nation’s government bonds and US Treasuries, Warjiyo said in the interview.
The central bank has enough firepower, even after interventions drained US$2bil from the central bank’s foreign-exchange reserves in September.
With the declining uptake of its rupiah-denominated securities, Bank Indonesia is preparing to offer foreign currency-denominated papers and swaps to lure inflows – or at least stymie outflows, he said.
Foreign-exchange swaps in Indonesia are used primarily as a domestic monetary operations instrument for open market operations for both liquidity absorption and injection.
On average, they represent approximately 25% to 35% of the total liquidity injections together with bonds and term repos.
Incoming dollar proceeds from exporters should also help underpin the currency.
“This is our tactic of putting eggs in different baskets,” Warjiyo said. — Bloomberg
