Indonesia’s central bank takes a pause as rupiah comes under pressure

Indonesia's central bank decided to keep rates on hold again today despite below-target inflation and a dimming growth outlook.

Price pressures have fallen sharply with August inflation at 1.3%, well below the 2-4% inflation target for the year. Meanwhile, the need for additional monetary stimulus remains apparent as growth prospects dimmed further with authorities expecting 3Q GDP to fall close to the lower end of the forecast range of -2.0 to 0.0%.

Pressure on the currency was undoubtedly the reason for Thursday’s pause with IDR down roughly 2% for the month with concerns about central bank independence acting as the main drag on sentiment and the currency.

Monetary authorities took extra effort to highlight their independence after the decision, indicating that “burden-sharing” bond purchases would undoubtedly end in 2020.

Officials however admitted that they would remain on “standby” for potential financing, but reiterated that President Jokowi and finance minister Indrawati had clearly stated that BI would remain independent.

We expect the central bank to keep rates unchanged until the currency stabilises which will likely only surface when concerns about potential follow-on bond purchases are put to rest for good.