ASEAN KEY DESTINATIONS
BI defends dovish stance despite dilemma
Bank Indonesia (BI) has defended its dovish stance, despite facing the dilemma of whether to cut its rate to spur growth or keep it to maintain stability.
After holding its monthly board of governors meeting on Oct. 15, BI maintained its benchmark policy rate at 7.5 percent, unchanged since February.
It hinted that a rate cut was possible, saying in an official statement that “in the future, there is room for monetary policy easing”, attributing the possible move to pressures on the macroeconomic stability that had begun to subside.
BI Governor Agus Martowardojo insisted late on Thursday that its dovish stance was backed by new data that had shown significant economic improvement with regard to inflation, current account and trade balance.
“If [economic progress] can be maintained, inflation may reach 3.6 percent this year,” he said, adding that the central bank expected to see economic growth rebound in the second half as well, higher than 4.7 percent and 4.67 percent in the first and second quarters, respectively.
“We are also seeing similar improvement in the current account. We predict CAD [current-account deficit] to hover at 1.95 percent of the GDP [gross domestic product] in the third quarter and remain at 2 percent or 2.1 percent for the full year. That is surely better than the 3 percent deficit we recorded in 2014.”
However, despite BI’s conviction, the rupiah tumbled following the rate announcement, depreciating 0.9 percent to 13,540 per US dollar the next day as the statement was mostly perceived as negative.
The currency depreciation mirrored what happened in February, when BI surprisingly cut its key rate by 25 basis points to 7.5 percent from 7.75 percent, resulting in the rupiah dropping 0.8 percent per dollar the following day.
Meanwhile, since the latest BI rate announcement, the rupiah rebounded 0.4 percent to close at 13,484 against the greenback on Friday.
Agus acknowledged that further development might result in a new set of economic data that could steer the central bank from its dovish stance. “Everything will be data dependent. We will only carry out changes in our policy if we are supported by data.”
He cited the lingering uncertainty over the next interest rate hike by the US Federal Reserve and China’s slowing economy as major factors to watch out for.
Experts contacted by The Jakarta Post agreed that the central bank was facing a dilemma.
OCBC Bank economist Wellian Wiranto said that a tough trade-off was taking place. “In an ideal world, there would certainty that the Fed would not hike its rate anytime soon and thus, leaving BI with room to cut rates,” he said.
“Obviously, the world is less than ideal and the possibility that the Fed may surprise the market and hike the rate is still there, even if lower than before.”
ANZ Indonesia’s head of markets Sonny Samuel said that a rate cut was possible as long as there was good balance and confidence on fiscal and monetary improvements against the threat of global uncertainty triggered by a potential US interest-rate hike.
“Question is, how aggressive will the US rate hike will be?” he wrote in an email.
Meanwhile, according to Barclays economist Wai Ho Leong and DBS Indonesia treasury head Wiwig Santoso, a rate cut by BI at this time would be premature, considering that the Fed had not increased its own key rate.
The use of the rate cut option is not without risks, since a cut at the wrong time might weaken the rupiah again should the Fed not jack up its rate, Leong said in an email.
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