BI to hold key rate, as hopes for easing emerge: Reuters poll

The Bank Indonesia will keep interest rates on hold on Thursday, a Reuters poll showed, as the Federal Reserve’s caution over further rate hikes has spurred some hopes Jakarta’s next move can be a cut.

All 25 analysts in the poll see Bank Indonesia (BI) keeping its 7-day reverse repurchase rate at 6.00 per cent, where it has been since November, reports Reuters.

The BI was among the most aggressive central banks in Asia last year, hiking rates six times by a total of 175 basis points (bps) to defend the then-falling rupiah.

The rupiah was under pressure for much of 2018 due to capital outflows stemming from the Fed’s rate increases, the US-China trade war and Indonesia’s large current account deficit.

But this year, after the Fed changed its tone, the rupiah has become one of the biggest gainers in emerging Asia.

“A more dovish Fed further reinforces our view since November that BI’s hiking cycle is over,” Nomura said in a Feb. 15 report, predicting BI would start cutting rates this or next year and eventually bring down borrowing costs by 100 bps.

Market talk about monetary easing to bolster economic growth have been increasing, especially after India cut rates this month and Indonesian inflation is seen staying in BI’s comfort range throughout 2019.

The country’s president, like India’s leader, face an election soon and a rate cut could help eventually lift growth that has been stuck around 5.0 per cent in recent years.

But the central bank Governor Perry Warjiyo said the two economies face different issues and repeated an earlier comment that the current level of Indonesia’s key rate is near its peak.

Fakhrul Fulvian, an economist with Trimegah Sekuritas, said a rate cut now would be “inconsistent” with BI’s pledge to reduce the current account gap, which was nearly 3.0 per cent of GDP, the widest in four years in 2018. BI officials have said it will narrow to 2.5 per cent this year.

Citigroup economist Helmi Arman said BI likely will need stronger signs the Fed is done raising US rates before cutting its benchmark. He expects 50 bps of cuts in the fourth quarter.

Capital Economics forecasts more tightening, rather than easing, due to global economic problems that put the rupiah under renewed pressure. The consultancy predicts BI will make two 25 bp hikes this year.

“Our baseline remains BI staying on hold through the year, but the risk is tilted towards a cut,” said Nagutha Mohamed Faiz of Bank of America Merrill Lynch.