Indonesia Interest Rate

Bank Indonesia leaves rates unchanged in August

New governor, old policy course: At its meeting on 18–19 August, Bank Indonesia (BI) decided to maintain the BI-Rate at 5.75% for a second straight month. The decision was the first under acting Governor Destry Damayanti following former Governor Perry Warjiyo’s sudden resignation in July, and it aligned with market expectations, as Destry chose to maintain BI’s previous policy course focused on rupiah stability.

Rupiah weakness continues to drive monetary policy: Rupiah stability remained BI’s main policy focus and dissuaded authorities from a cut, but the Bank again opted against a hike to avoid spikes in domestic rates that could pressure the economy. Instead, BI continued to support the currency and foreign investment inflows through other measures, including lower costs for FX hedging transactions and further development of the money and foreign exchange markets. BI also moved to increase liquidity and reduce liquidity segmentation in the money market and banking sector.

Rate hikes by December remain on the table: Roughly three quarters of our panelists see BI hiking rates by at least 25 basis points by December amid persistent rupiah weakness and rising inflation, with potential U.S. Fed hikes posing an upside risk. The remainder of our panel sees rates ending at current levels, likely as market sentiment improves following Governor Destry’s appointment and as the rupiah regains some ground on the USD, allowing the Bank to switch to a pro-growth stance. BI is scheduled to reconvene on 22–23 September.

Panelist insight: Nomura’s Euben Paracuelles and Nabila Amani commented: “We continue to forecast no change in the policy rate at the next meeting in September. We still, however, expect another 50bp of BI rate hikes in Q4 to 6.25%, owing to our view of persistent [balance of payment] pressures that threaten FX stability and leave BI with little option but to resume raising its policy rate in response to significant IDR weakness.” EIU analysts said: “A weakening external position, worsening fiscal credibility and unfavourable global financial conditions will maintain pressure on the rupiah. Meanwhile, still-firm economic growth—at 5.3% year on year in the second quarter—will give BI room to tighten further, despite an expected moderation in activity during the second half of the year.”

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