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(Bloomberg) — The Bank of Indonesia left its benchmark interest rate unchanged and cautiously eased policy as it awaited more convincing signs of rupiah stability and manageable inflation.
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The BI rate remained at 6% on Wednesday, as expected by 28 economists polled through Bloomberg. Gov. Perry Warjiyo told reporters that policymakers would be “patient” and keep an eye out for any danger to the local currency and inflation, especially given geopolitical tensions and uncertainty around the Fed’s easing path.
“Of course, there will still be room for a relief in the BI rate in the future,” Warjiyo said at the briefing. It depends on how temporarily the rupee strengthens, whether inflation remains manageable and whether credit expansion is robust enough for the economy, he added.
“We will meet again next month to measure our patience or impatience regarding policy direction,” he said, without committing to any time-frame for a pivot. In December, he had said rate cuts were unlikely in the first half of 2024.
A weakened currency could simply exacerbate price pressures in Southeast Asia’s largest economy, which has had to increase rice imports by more than 600% in 2023 due to El Niño-induced droughts.
Continued disruptions to fountains due to dry weather, as well as the growing call for similar activities ahead of the Feb. 14 election, as well as the Muslim fasting era of Ramadan, may simply drive up food costs. Volatile food inflation rose to the still-high point of 6. 73% in December. Although profit fell to 2. 61%, this point is above the midpoint of BI’s inflation target of 1. 5% to 3. 5% for this year.
Faltering exports, dragged by lower commodity prices of coal and palm oil, also eroded the nation’s trade surplus last year by a third to $37 billion and removes a pillar of support for the rupiah. The rupiah held an earlier loss to close at 15,640 against the greenback on Wednesday, its weakest in a month. It’s down 1.6% so far this year.
Central banks around the world are wary of ill-timed rate cuts, as war rages in Europe and the Middle East and tensions rise between Taiwan and China. Domestically, the national elections in February increase political uncertainty. President Joko Widodo, who has overseen major infrastructure investments and accelerated resource processing on land, ends his two-term reign at the end of this year.
The Bank of Indonesia expects the Federal Reserve to start cutting rates in the second half of this year with three rate cuts totaling 75 basis points. This would merit additional support for the rupee despite its recent fluctuations. To attract more foreign flows, the central bank plans to increase the use of special services for export dollars.
However, indications that borrowing costs could stay higher for longer ups the risk of stifling Indonesia’s already tepid consumer spending and bank lending in a year of political transition. Slowing economic growth has been a major talk point ahead of the February vote, as presidential candidates pledge to create more jobs, boost mineral processing and invest in infrastructure to spur expansion beyond the usual 5% trajectory.
Far from accelerating, gross domestic product data due next month will likely show Southeast Asia’s largest economy grew at a slower pace of 4. 7% in the fourth quarter, following a 4. 9% expansion over the past three months, according to Miguel Chanco of Pantheon Macronomics Ltd.
“This might seem like minor shifts to the casual observer,” he said. “But sub-5% growth says a lot is wrong in the Indonesian context, where this headline rate is effectively married to the 5% mark.”
The last time BI declined before the pandemic, GDP expansion began to slow “from a little above 5%,” Chanco said. The central bank maintained its economic expansion forecasts for 2023 and the current year at 4. 5%-5. 3% and 4. 7%-5. 5%, respectively.
–With assistance from Eko Listiyorini, Norman Harsono and Tomoko Sato.
(Updates with more main points of the report, economist’s note).
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