INDONESIA’S central bank kept its benchmark interest rate unchanged to support the economy’s recovery, while downgrading its growth outlook and saying it will keep a watch on price pressures fueled by the Russia-Ukraine conflict.
Bank Indonesia (BI) held the seven-day reverse repurchase rate at a record low 3.5% on Tuesday as expected by all 29 economists in a Bloomberg survey. The key rate was last adjusted in February 2021.
“The decision is consistent with the need to maintain exchange rate stability and control inflation, coupled with efforts to revive economic growth despite a build-up of external pressure,” Governor Perry Warjiyo said, citing Russia’s war in Ukraine and faster global monetary policy normalization as risks.
The rupiah, which has been among the least volatile currencies in Asia, was trading around 0.15% stronger against the dollar after the decision. The currency has weakened just 0.6% so far this year.
Like most of its neighbors, Bank Indonesia is waiting for a recovery in Southeast Asia’s biggest economy to take hold before unwinding pandemic-era monetary support. Policy makers have pledged to keep borrowing costs low to boost bank lending as the economy reopens, even as peers in advanced economies have turned to tightening policy settings to combat inflation.
The central bank lowered the economy’s growth forecast this year to a range of 4.5%-5.3% from 4.7%-5.5% earlier, underlining the need for continued support. Bank Indonesia also sees global expansion slowing to 3.5% from 4.4% amid supply chain disruptions caused by the war.
Indonesia has policy space to stand pat, for now, with inflation hovering below the midpoint of its 2%-4% target band despite rising food and fuel prices. Warjiyo said on Tuesday that inflation remains manageable, with the forecast for price growth kept steady at 2%-4% for the current year while watching for any risks from global spillovers.
“Slower growth and higher inflation mark an uneasy combination for many policymakers now,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “Despite such budding growth concerns, we expect BI to start to prioritize inflation fight” going forward.
Policy makers have reason for caution as government price-controls that kept inflation benign earlier this year are rolled back to ease pressure on the state budget. Value-added taxes were also raised this month, with power tariffs possibly next.
A more aggressive tightening by the Federal Reserve could add another layer of risk to Indonesia’s policy outlook. The Fed is seen weighing a hike of as much as 50 basis points at its May meeting — a move that could spur a sell-off in emerging-market assets and weaken the local currency. — Bloomberg