Indonesia's central bank stands firm on interest rates amid currency and inflation concerns

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Indonesia's central bank stands firm on interest rates amid currency and inflation concerns

Thursday, Indonesia's central bank, Bank Indonesia, announced that it will maintain its benchmark seven-day reverse repo rate at 5.75%, a decision in line with the expectations of economists surveyed by both Bloomberg and The Wall Street Journal. This rate, a four-year high, has been consistent for eight consecutive months.

The decision comes amidst concerns about the stability of the rupiah, which has depreciated more than 2.5% against the dollar this quarter, making it one of the weakest pairs in Asia. The Federal Reserve's recent indication that rates will likely remain high after an additional hike this year could bring US borrowing costs on par with Indonesia's for the first time.

Bank Indonesia Governor Perry Warjiyo reassured that the rupiah is under control in accordance with policy measures. The central bank has implemented several strategies to encourage foreign inflows and stabilize the currency while sustaining a growth-supportive interest rate.

The bank's market tools appear to be gaining traction, with new rupiah securities called SRBI attracting nearly 38 trillion rupiah ($2.5 billion) in its first two auctions. The foreign exchange term deposit for exporters received its highest funding earlier this month.

Despite calls from Indonesian lawmakers for a "bold but measured" easing of monetary policy to boost economic confidence, Bank Indonesia remains cautious of potential inflation risks due to rising rice and oil prices.

Last month, rice prices in Southeast Asia's largest economy surged nearly 14% year-on-year, marking the fastest pace in a decade. Despite this, headline inflation remained within the central bank's target at 3.27% in August.

Bank Indonesia maintains its economic growth forecast for 2023 at 4.5%-5.3% and expects inflation to stay within its 2%-4% target range. It also anticipates an easing of inflation to 1.5%-3.5% in 2024.

Governor Warjiyo stated that the rupiah exchange rate has remained stable due to central bank intervention and has appreciated 1.22% against the dollar so far this year. He expects the rupiah's stability to continue, reflecting positive investor sentiment towards Indonesia's economic outlook, low inflation, and attractive returns on domestic financial assets.

The central bank also maintained its overnight deposit facility rate at 5.00% and lending facility rate at 6.50%. The Indonesian economy's robust growth is supported by domestic demand, increased household consumption, and investment, according to Warjiyo.

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