(Bloomberg) -- Bank Indonesia warned there is less scope for it to further lower interest rates as political developments in the US add to global risks, spurring fund flows into the dollar and pressuring the rupiah.
“The room for rate cuts that we previously saw as wide does seem narrower now,” Bank Indonesia Governor Perry Warjiyo said in a briefing on Wednesday, after he announced that the benchmark BI-Rate would be kept unchanged at 6%.
Indonesia’s central bank stood pat for the second month in a row after a surprise reduction in September. The move was forecast by 27 of the 36 economists surveyed by Bloomberg, while the remainder expected a quarter-point cut.
External jitters featured heavily in Warjiyo’s remarks, as the rupiah weakened further toward the key support level of 16,000 per dollar.
Warjiyo said Bank Indonesia is scrutinizing President-elect Donald Trump’s plans for higher tariffs and spending. They now expect the Federal Reserve to deliver fewer rate cuts, slashing their forecast to only 75 basis points in reductions through 2025, from as much as 125 basis points previously.
All of these factors point to a stronger dollar, Warjiyo said.
“If we consider the low domestic inflation and the need to boost economic growth, of course there is still room for rate cuts” in Indonesia, Warjiyo said. “But with the rapid development of global dynamics, the focus of our monetary policy remains directed at strengthening rupiah stability against global geopolitical and economic uncertainties.”
The rupiah held its loss at 0.2% against the greenback following the rate decision on Wednesday. Indonesia’s benchmark stocks gauge trimmed losses to 0.2%, while 5-year and 10-year yields were unchanged.
Warjiyo’s predicament highlights how emerging-market central banks have had to set aside domestic growth concerns to steady their currencies, after Trump’s victory drove up the dollar. The Philippine central bank said on Wednesday it could also pause its easing if the weakened peso spurs imported inflation.
While Indonesia’s inflation is set to remain manageable and within the central bank’s 1.5%-3.5% target band for 2024 and 2025, domestic activity needs a boost. Southeast Asia’s largest economy grew at its slowest pace in a year last quarter, with high borrowing costs dampening consumption and factory activity.
Bank Indonesia, which has currency stability as a key mandate, expressed concern earlier this month that everything from dollar strength, geopolitics and trade tensions will put pressure on the rupiah. Last week, it acknowledged it had intervened to support the currency, which has declined more than 4% this quarter.
“Bank Indonesia will continue to pay close attention to rupiah movement, inflation, and global data in observing the room for further rate cuts,” Warjiyo said today.
Read: Indonesia Intervenes as Rupiah Nears 16,000 Per Dollar Level
As the dollar rallies and the US economy remains strong, PT Bahana Sekuritas no longer sees any BI rate cuts this year. “It would need extraordinary pullback in the dollar index and US Treasury yields for BI to continue its easing cycle,” economist Satria Sambijantoro wrote in a note.
Gareth Leather, senior economist at Capital Economics, wrote in another note that BI’s next reduction likely won’t be until the second half of 2025.
In the meantime, Bank Indonesia repeated it will keep intervening in the spot, domestic non-deliverable forwards and bond markets to steady the rupiah. Its dollar reserves rebounded to a fresh record in October, allowing the monetary authority ample ammunition.
The central bank will also keep offering its high-yield rupiah securities, known as SRBI, to attract inflows and support the rupiah. Investors should also be lured by Indonesia’s low inflation, attractive asset returns and healthy growth prospects, the governor said.
“Rupiah stability will be maintained not only by intervention efforts, but also by optimizing market operation tools to attract inflows and support the currency,” Warjiyo said.
--With assistance from Prima Wirayani, Eko Listiyorini, Claire Jiao and Cecilia Yap.
(Recasts with more comments from Warjiyo in the briefing.)
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