Jakarta steady as rupiah slides

Indonesian consumers are beginning to feel the effect of Donald Trump. Source: Wikimedia

The Indonesian central bank concluded a policy meeting shortly after the US Federal Reserve raised interest rates and kept its benchmark steady and said it was alert to the risk of “reversals” of capital flows.

The main policy rate was maintained at 4.75 per cent.

The US Federal Reserve signalled that it may raise interest rates three more times next year. Markets have been volatile since Donald Trump’s unexpected victory last month, causing anxiety among policy makers in Indonesia after six rate cuts this year.

Juda Agung, Bank Indonesia (BI) boss, declined to assess the Fed’s projection of three rate hikes next year, saying there was “high probability” Washington’s central bank would subsequently alter its plan.

But he said the archipelago was better equipped to face any rate increase than during the 2013 “Taper Tantrum”.

“This decision to hold is consistent with the expectations of inflation for next year and the need to maintain the stability of the rupiah in the near term,” said Josua Pardede of PT Bank Permata in Jakarta.

Analysts said as the BI had cut its benchmark 150 basis points this financial year and had to support the rupiah, the current benchmark might remain consistent.

The rupiah weakened 0.77 per cent on Thursday, in line with emerging market currencies’ decline against the dollar.

Jakarta’s principal stock exchange touched its lowest level in nearly two weeks with the financial and consumer sectors accounting for most of the losses.

“The threat of further interest-rate rises in the US means that BI is likely to tread extremely carefully,” said Oliver Jones of Capital Economics in London.

The central bank’s cuts this financial year have been aimed at boosting the growth rate, which fell last year to 4.8 per cent, the lowest since 2009.

Agung said firms had “far better” balance sheets compared with last year, which should make banks more confident about extending loans.

Annual growth was 5.02 per cent in the third quarter, slowing from April to June, suggesting the economy might fail to bounce back to full health.

Annual inflation was 3.6 per cent last month, well inside BI’s 3- to 5-per-cent target range.