JAKARTA, April 13, 2015:

Indonesia’s central bank is expected to keep its benchmark interest rate on hold at a policy meeting tomorrow, due to concerns over a weak rupiah currency and the risk of capital outflows if foreigners reduce holdings in government bonds. A Reuters poll showed 18 analysts forecast Bank Indonesia (BI) to hold its policy rate at 7.5%, with two seeing a cut by 25 basis points.

“The recent weakness in the rupiah together with risk of US Fed Funds hike will probably cause BI to stay put on rates over the next few months,” Credit Suisse wrote in a research note. The rupiah hit its weakest level in 17 years in March, falling to 13,245 rupiah (RM3.75) to the dollar, and it could come under renewed pressure if BI were to lower interest rates at a time when US rates were expected to rise. The government bond market would be vulnerable to capital outflows, as foreign investors held 38.47% of outstanding government bonds as of April 8. Since March, the rupiah has rallied and was trading at 12,950 per dollar on Monday, but it is likely to weaken this year, according to a separate Reuters poll. The rupiah, the second worst-performing currency in emerging Asia this year after the Malaysian ringgit, is expected to lead losses against the dollar and weaken 5% in 2015 on expectations that the US Federal Reserve will start hiking rates. BI’s Senior Deputy Governor Mirza Adityaswara has said that the central bank doesn’t have the luxury to go against what is happening in global financial markets and that maintaining stability is BI’s focus. BI cut its benchmark rate by 25 basis points in February when it revised its inflation outlook to a more benign 4% at the end of this year.

The central bank became more concerned about the country’s currency in March, when it paused its rate cuts and lost almost US$4 billion (RM14.68 billion) in foreign exchange reserves, partly defending the rupiah. But most analysts who gave a longer-term view said there is scope for more rate cuts later in the year, as inflation slows.

They said BI will become less worried about the currency if it weakens gradually.

Loosening monetary policy could also help revive growth in Southeast Asia’s largest economy, where gross domestic product expanded by 5.02% in 2014, the slowest for five years.

“A weaker currency should also help boost (export) competitiveness, which has been eroded by rapid wage growth and high inflation,” said Capital Economics.

Annual inflation rose to 6.38% in March from 6.29% in February, reducing chances for lower interest rates.

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