August 22, 2024
JAKARTA – Bank Indonesia (BI) has kept its benchmark interest rate unchanged and sees room for a cut opening up only in the fourth quarter, despite signals pointing to faster monetary policy easing in the United States.
Following the central bank’s monthly policy meeting in Jakarta on Wednesday, BI Governor Perry Warjiyo affirmed that the BI Rate remained at its current level of 6.25 percent.
“Consistent with our previous statement, room for a BI Rate [cut] will open up in the fourth quarter of 2024”, Perry said, thereby suggesting that no change was to be expected in September either, with BI viewing the third quarter as a time for “further strengthening of the rupiah’s exchange rate stability”.
Trading at Rp 15,520 to the US dollar on Wednesday afternoon, the rupiah has strengthened by 4.52 percent against the greenback compared to its position exchange value at the end of July, thanks to portfolio inflows.
BI noted that most of the August inflows went into government bonds as opposed to those issued by the central bank.
In the first 20 days of August, foreign capital inflows to Indonesian government bonds amounted to Rp 25.17 trillion (US$1.62 billion), followed by BI-issued bonds (SRBI) with Rp 10.8 trillion and stocks with Rp 6.5 trillion, Perry said at Wednesday’s press briefing.
This movement was mainly driven by anticipation of an impending reduction in the US Federal Reserve’s (Fed) benchmark rate, the federal funds rate (FFR). Perry acknowledged that the latest developments suggested the Fed would cut “faster and more than previously estimated”.
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The governor said there was a more than a 75 percent chance of a 25-basis-point (bps) FFR cut in the Fed’s policy meeting scheduled for Sep. 17 and 18.
BI is scheduled to hold its next monthly policy meeting on the same dates and announce its rate decision just hours before the Fed does.
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Perry noted that uncertainty in global financial markets had subsided but said risks of a global economic slowdown, as well as geopolitical anxiety amid the US election, “have to be heeded”.
“I see that it’s true how the American economy seems to be at a turning point. US economic growth will likely slow down in the second half, as is the case with inflation. [The impression] is getting firmer that it is headed toward the long-term target of 2 percent,” said Perry.
He added that a second 25 bps FFR cut was on the table for either November or December and that more cuts were likely to follow in the first and second quarter of next year.
Considering the US developments on inflation and monetary policy, Bank Danamon economist Hosianna Evalita Situmorang told The Jakarta Post on Wednesday that BI’s baseline was “conservative” for the purpose of propping up the rupiah.
In an analysis released on Wednesday, Hosianna wrote that a stronger currency was “beneficial for the domestic economy” by virtue of “keeping prices low, supporting industrial expansion and job creation, which in turn aids economic growth”.
She said Indonesia’s monetary authority was likely to cut the BI Rate just once in the second half and wait for the Fed’s guidance and that the positive performance in net international investment was to continue throughout the third quarter.