(Bloomberg) -- Indonesia’s central bank will likely leave its benchmark interest rate unchanged to maintain support for the rupiah in the face of fiscal uncertainty at home and persistent geopolitical tensions abroad.
All 35 economists surveyed by Bloomberg expect Governor Perry Warjiyo and his board to hold the BI-Rate at 6.25% for a third straight month on Wednesday.
Bank Indonesia, whose primary mandate is to ensure currency stability, is getting a breather from subsiding corporate dollar outflows. Also, growing confidence that a US policy rate cut may happen as early as September has bolstered the rupiah, which has gained 1.2% so far this month — rebounding from its four-year low in late June.
Warjiyo himself has signaled that policymakers may start weighing a pivot to monetary easing, telling lawmakers earlier this month that there could be room for a rate cut in the last quarter of this year if the currency gains further.
The currency, however, still demands vigilance. Risks extend beyond the Federal Reserve’s anticipated pivot, the US elections and geopolitical tensions, to other pressing issues at home. That includes a weakening external balance and uncertainty around the fiscal stance of the incoming government, which is set to take office in October.
“The rupiah still faces challenges to strengthen further below 16,000 per dollar,” said Hosianna Evalita Situmorang, economist at PT Bank Danamon Indonesia, referring to the level that Warjiyo said reflects the fundamental value of the rupiah.
“BI will definitely maintain the risk premium spread in anticipation of heightened uncertainty in the next quarters,” she said.
Here’s what to watch out for the central bank’s rate briefing at 2 p.m. local time:
Twin Deficits
Analysts expect the central bank to resist the rush to a dovish policy stance and instead wait for the rupiah to find firmer footing. “BI will still put financial market stability as a priority,” said Dian Ayu Yustina, economist at PT Bank Mandiri in Jakarta, who sees a rate cut in the last quarter.
Domestically, the nation’s current account gap is expected to widen to nearly 1% of gross domestic product this year, while currency weakness is seen to push the budget deficit to a much wider 2.7% of GDP, potentially dampening investors’ appetite for Indonesian assets.
“Given twin deficits in both the current account and fiscal account, we think the rupiah will remain vulnerable to external risks,” Lloyd Chan, Singapore-based FX strategist at MUFG Bank Ltd, said in a note.
“Our near-term bias for the rupiah is still skewed to the downside,” Chan said, adding that BI may only start easing in early 2025. Likewise, Bank Danamon forecasts that the BI-Rate will not move this year if the rupiah remains above 16,000 per dollar.
The rupiah has recently enjoyed a reprieve with foreign investors buying almost $550 million worth of stocks and government bonds this month. Dividend payouts, which drove rupiah depreciation and forced the central bank to intervene last quarter, have also been waning.
Bank Indonesia’s high-yielding rupiah securities, or SRBI, also continue to see inflows, although local funds’ stakes have accelerated recently.
Fiscal Future
Further gains in the rupiah will also hinge on President-elect Prabowo Subianto’s fiscal policy stance. News reports on his plans to raise Indonesia’s debt ratio and even scrap legal limits on the budget deficit have jolted investors and weighed on the currency.
Prabowo’s camp has again reassured the market that the next president will stick to a prudent spending plan. The outgoing administration has also set next year’s budget deficit in the range of 2.3%-2.8% of GDP, still under the ceiling of 3% of GDP.
Investors have shown tentative signs of positive sentiment on the “market-friendly” messages on the economy and fiscal policy from Prabowo and his team, Winson Phoon, head of fixed income research at Malayan Banking Bhd. wrote in a note.
“It could form a positive feedback loop to extend the rally in bonds and FX, in our view,” Phoon said.
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