Indonesia Central Bank Holds Steady Amid Rising Uncertainties

By Gayatri Suroyo and Stefanno Sulaiman

JAKARTA (Reuters) – Indonesia's central bank kept interest rates unchanged on Wednesday to control inflation and stabilize the rupiah amid increasing financial market uncertainties.

This decision came after neighboring countries Thailand and the Philippines cut their rates. Most economists polled by Reuters expect Bank Indonesia (BI) to reduce rates before year-end, following an unexpected cut last month.

BI Governor Perry Warjiyo highlighted rising tensions in the Middle East and potential rate cuts by the U.S. Federal Reserve as uncertainties impacting the rupiah's stability, which has faced pressure recently.

> “The focus of short-term monetary policy is on the stability of the rupiah exchange rate due to increasing uncertainty in global financial markets,” Warjiyo explained.

The central bank maintained the benchmark 7-day reverse repo rate at 6.00%, the overnight deposit facility rate at 5.25%, and the lending facility rate at 6.75%.

Economist Ryota Abe from SMBC indicated that the next BI rate cut would largely depend on the foreign exchange market situation by mid-November, coinciding with the bank's next meeting. He noted potential considerations arising from the U.S. presidential election.

Last month’s rate cut from BI preceded the expected reduction from the Fed. Since then, the rupiah has shown increased volatility against the U.S. dollar, reflecting changing expectations about further U.S. rate cuts and escalating Middle Eastern conflicts.

Warjiyo expressed confidence in Fed rate cuts anticipated in November and December, each by 25 basis points.

> “Should there be a change to this, it is only a matter of timing,” he stated, noting the limited impact of such adjustments.

Warjiyo emphasized that the prevailing factor is the tension in the Middle East. The central bank will evaluate the possibility of further rate cuts while factoring in inflation, the rupiah's stability, and economic growth prospects.

Annual inflation in Southeast Asia's largest economy decreased to 1.84% last month, the lowest since 2021, approaching Bank Indonesia's target range of 1.5% to 3.5%.

Indonesia’s post-pandemic economic growth remains solid at 5%, although this level is below the 8% target set by Prabowo Subianto, who will be inaugurated as president on Sunday.

The central bank maintained its economic growth outlook at 4.7% to 5.5% for this year, anticipating an acceleration in growth for the next year.