Indonesia Holds Key Rate Ahead of Fed Amid Rupiah's Slump

Indonesia's central bank kept its main interest rate unchanged for a seventh month, avoiding a cut that might further weaken the nation's slumping currency as the U.S. considers raising borrowing costs.

Governor Agus Martowardojo and his board held the reference rate at 7.5 percent, a decision that anticipates a Federal Reserve rate rise later on Thursday, Bank Indonesia said in Jakarta. It had been predicted to hold by all 13 analysts surveyed by Bloomberg News. The authority also maintained the rate it pays lenders on overnight deposits, commonly referred to as the Fasbi, at 5.5 percent, as forecast.

The decision underscores the constraints Indonesia's policy makers face in managing a faltering economy amid the risk of capital outflows and market volatility, with the U.S. Federal Reserve hours away from a closely watched decision that might end almost seven years of near-zero interest rates. While government spending has been slow to take off, the central bank's ability to provide monetary stimulus is limited by the rupiah, which has fallen more than 14 percent against the dollar this year.

Little Space

"In these kinds of conditions, they have little space to move," said Juniman, chief economist at PT Bank Internasional Indonesia in Jakarta. "The problem is with the rupiah and the uncertainty around the Fed."

The Indonesian currency closed unchanged at 14,459 to the dollar in Jakarta Thursday, according to prices from local banks. The rupiah has been the worst performer after the ringgit among 11 Asian currencies tracked by Bloomberg this year. The Jakarta stock market trimmed gains after the decision to close up 1.1 percent.

The central bank sees rupiah depreciation due to external factors, with Bank Indonesia's short-term focus on currency stability, it said in a statement. It is seeking to keep the currency's volatility below 10 percent, spokesman Tirta Segara said. Bank Indonesia plans new money market instruments to absorb excess funds and help stabilize the rupiah, he said.

Rupiah Volatility

Keeping the rate on hold is in line with its inflation targets, Bank Indonesia said in its statement. Inflation was 7.18 percent in August, the highest rate in Asia, and above the central bank's 2015 target of 3 percent to 5 percent.

Inflation should fall back once the impact of last November's cuts to fuel subsidies drop out of the annual comparison, potentially creating an opening for Bank Indonesia to cut rates before the end of the year, Gareth Leather, an economist at Capital Economics Ltd., said in a note.

"In the event that a hike in U.S. interest rates triggered another sharp sell-off in the rupiah, it would be difficult for BI to loosen policy at all," Leather said.

Source: Indonesia Holds Key Rate Ahead of Fed Amid Rupiah's Slump