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JAKARTA: Indonesia’s central bank kept interest rates unchanged on Wednesday (Aug 21), as expected, preferring to focus on stabilising the rupiah before potentially cutting rates later this year.
Bank Indonesia (BI) kept its benchmark seven-day reverse repurchase rate at 6.25%, where it has remained since April, in line with the expectations of all 30 economists polled by Reuters.
Bank Indonesia also kept its overnight deposit rate and lending rate unchanged at 5.50% and 7%.
Bank Indonesia continues to see room for rate cuts in the fourth quarter, while the focus this quarter will be on supporting further strength of the rupiah against the dollar, Bank Indonesia Governor Perry Warjiyo said at a press conference.
“A stronger rupiah is good for the Indonesian economy. A stronger rupiah makes prices cheaper, especially food prices, and supports low inflation through imported inflation,” Warjiyo said.
Inflation, which has been within the central bank’s target range of 1.5% to 3.5% since mid-2023, fell to 2.13% last month, the lowest level since February 2022.
In April, Bank Indonesia unexpectedly raised interest rates to support the rupiah, which has fallen to its lowest level in four years against the dollar as risk aversion caused by geopolitical concerns and uncertainty over U.S. interest rates led to capital outflows.
The rupiah has appreciated about 5% this month and is now near its highest level this year as the dollar weakened in anticipation of a September rate cut by the Federal Reserve.
BI’s base case is that the Fed will cut rates twice this year and three more times in 2025, Warjiyo said.
Some economists expect Bank Indonesia to wait for a rate cut from the Federal Reserve before starting to ease policy.
“We still believe that Bank Indonesia will start easing monetary policy in the fourth quarter by cutting rates by 25 basis points following the Fed’s rate cut,” said Brian Lee, economist at Maybank Investment Bank Group.
“As Bank Indonesia focuses on rupiah stability, we believe Bank Indonesia will now look to hedge against the risks of a stronger dollar and a recovery in U.S. yields.”
The rupiah was trading at 15,480 per dollar on Wednesday, down 0.4% from the previous day and hitting its highest level since the beginning of the year.
Some central banks have already begun easing policy, including the Philippines and New Zealand. Thailand’s central bank left its benchmark interest rate unchanged on Wednesday.
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