Indonesia holds rate steady after six cuts

Indonesia’s central bank kept its benchmark interest rate unchanged after six cuts this year, seeking to calm financial markets in the wake of the United States presidential election results.

Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.75 per cent yesterday. Analysts had said market volatility following Mr Donald Trump’s victory meant Bank Indonesia (BI) could not cut its benchmark rate for a seventh time this year.

The rate hold “is in line with BI’s cautiousness in responding to the escalating uncertainty in the global financial market after the US election”, the central bank said in a statement.

The central bank had reason to pause after taking aggressive action this year to boost growth amid a benign inflation environment.

Expectations of more US interest rate increases caused the rupiah to plunge as much as 3.7 per cent against the US dollar last week, prompting BI to intervene to stabilise the Indonesian currency.

“While BI is chasing for faster growth, one cannot be too complacent of the risks involved and how the rupiah traded post-US elections is a timely reminder of this,” DBS Group Holdings economist Gundy Cahyadi said before the rate decision.

BI has cut its main policy rate this year by a total of 150 basis points. Despite the rate cuts, loan growth has continued to weaken.

As of September, annual expansion of outstanding loans was at 6.47 per cent, its weakest in nearly seven years, as commercial banks grappled with increased levels of bad loans.

The government is forecasting growth of about 5 per cent for this year, well below the 7 per cent targeted by President Joko Widodo when he came to office two years ago.

Inflation remained subdued at 3.3 per cent in October, close to the lower end of the bank’s 3 per cent to 5 per cent target.

“BI faces a difficult balancing act,” Capital Economics said. “Despite having cut interest rates six times this year, the domestic economy could clearly do with some additional support… But the threat of further falls in the rupiah means that BI is likely to act with caution.”