Indonesia’s central bank keeps policy rate at record high amid rupee and virus concerns

The Bank of Indonesia (BI) kept the benchmark 7-day repo rate at 3.50% for a fourth consecutive meeting, as predicted by 26 economists in a Reuters poll. Its other two main rates also remained unchanged.

Gov. Perry Warjiyo has reiterated his commitment to keeping interest rates low and liquidity plentiful until inflation rises, which he expects to happen at the earliest early in this year. 2022. Inflation reached 1.68% in May but remained below BI’s target of 2% to 4%.

But the Federal Reserve began closing the door on its pandemic-induced monetary policy at its central bank meeting, and the prospect of cutting spending in the United States could complicate things for BI as it could trigger capital outflows, analysts said.

“It’s too early to talk about cutting spending (in the US). We see that the market is still relatively stable,” Warjiyo said at a streaming press conference.

He said the Fed is more likely to start cutting its bond buying program in the first quarter of next year, and rate hikes are likely to occur the following year.

The Fed’s announcement in 2013 that it would cut its quantitative easing triggered capital outflows into emerging markets, with Indonesia among the hardest hit as its currency fell by more than 20%.

The rupee fell 0.94% against the dollar in reaction to the Fed’s statement, but has since stabilized at around 0.8% following BI’s move.

BI has cut interest rates by 150 basis points in total and injected more than $ 57 billion in liquidity into the financial system since 2020.

Meanwhile, the country is grappling with an increase in COVID-19 cases in several provinces, including its capital, suggesting authorities may reintroduce mobility restrictions that could affect the economic recovery.

BI “seemed to indicate there was no rush to change interest rates anytime soon,” Capital Economics said in a note.

Indonesia’s economy contracted 0.74% year-on-year in January-March after contracting 2% in 2020 due to the fallout from the pandemic.

BI maintained its forecast of GDP growth of between 4.1% and 5.1% this year.

The governor said BI will monitor the impact of the increase in cases on economic activity.

(Reporting by Gayatri Suroyo, Fransiska Nangoy and Tabita Diela; Editing by Ana Nicolaci da Costa)

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