Bank Indonesia Holds Rate Steady to Guard Vulnerable Currency

  • Indonesia’s central bank left its benchmark interest rate at a record low to protect the currency, and said it had formulated a plan to deal with eventual U.S. policy tightening.
  • Bank Indonesia kept the seven-day reverse repurchase rate at 3.5% on 19 Aug 21, as expected by all 28 analysts in a Bloomberg survey. Interest rates have been on hold since Feb 21’s 25-basis point reduction, and are widely expected to stay at this level throughout 2021.
  • “The decision is consistent with the need to maintain the exchange rate and financial system amid low inflation, and for the economy to recover from the pandemic impact,” Governor Perry Warjiyo said at a briefing in Jakarta. Monetary policy will remain loose and accommodative, he said.
  • The decision comes with Bank Indonesia keen to protect the rupiah, given the weaker economic outlook amid the pandemic and the risk that potential U.S. monetary policy tightening could spark a sell-off of emerging-market assets.
  • Indonesia was among emerging markets hardest hit in 2013 when the U.S. Federal Reserve began unwinding its easy policy from the global financial crisis.
  • This time, Warjiyo said Bank Indonesia had formulated a plan to deal with local fallout and had experience with policies to mitigate the impact, as well as ample foreign-exchange reserves.
  • Warjiyo said the Fed has communicated its exit policy clearly and transparently, while markets already know how to digest the taper talk this time around.
  • Bank Indonesia can deal with the fallout via a policy of triple intervention — in the foreign exchange market, domestic non-deliverable forwards market, and the government bond market — and by coordinating with the Finance Ministry to manage yield differentials from the U.S., he said.

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