Moody's Advises Bank Indonesia to Pause Monetary Easing Drive
Today, the central bank of Indonesia (Bank Indonesia) decided to keep its key interest rate - the seven day reverse repo rate - at 4.25 percent, a decision that had been expected by most - if not all - analysts as there have been rising pressures on the rupiah exchange rate after two surprise rate cuts in August and September, while there remain plenty of external matters that make investors careful about investing in emerging market assets.
In a research note, global credit rating agency Moody's Investors Service advises Bank Indonesia to pause its monetary easing push as the US Federal Reserve has become more hawkish recently. Market participants expect the US central bank to hike its key rate in December 2017. Meanwhile, between January 2016 and September 2017, Bank Indonesia cut its seven-day reverse repo rate by a total of eight times from 7.25 percent to 4.25 percent (in an effort to boost the nation's economic growth).
However, if Bank Indonesia were to pursue further monetary easing by cutting interest rates, then it could ignite concern among investors and could likely result in more capital outflows from Indonesia. Between 23 August and 18 October a total of IDR 20.94 trillion (approx. USD $1.55 billion) worth of foreign funds had already left the Indonesian capital market.
Also Eric Sugandi, Chief Economist at the SKHA Institute for Global Competitiveness, feels Bank Indonesia cannot push for more rate cuts in the near future as the difference between the real interest rates of Indonesia and advanced economies would become too narrow and therefore unattractive to foreign investors.
Currently there are too many external factors or uncertainties that make investors opt for safe havens, for example US tax reforms, a looming US interest rate hike, and geopolitical tensions in North Korea and Spain. Amid US dollar strength, the Indonesian rupiah depreciated nearly two percent over the past month.
So far, Bank Indonesia's monetary easing drive has had limited impact on banks' credit rates, hence credit growth only grew a modest 8.4 percent year-on-year (y/y) per August 2017.