(Bloomberg): Indonesia’s central bank left its policy rate unchanged and signalled that while it may have room to cut borrowing costs later this year, it’s in no rush to ease to ensure support for the rupiah.

Bank Indonesia (BI) kept the BI-rate at 6.25% for a third straight meeting on Wednesday, a decision expected by all 35 economists surveyed by Bloomberg News. The rate is at its highest level since the benchmark was introduced in 2016.

“The focus of monetary policy in the short-term is directed at strengthening rupiah exchange rate stabilisation and attracting foreign portfolio inflows,” governor Perry Warjiyo said in a briefing in Jakarta.

“Our inflation is low and our economic growth is good, that’s why I said there is room to lower the interest rate, if there’s no global influence,” he said when asked whether BI is on course to weigh a rate cut next quarter.

Bank Indonesia stuck to its cautious stance even though it sees the Federal Reserve pivoting by November, from its prior forecast of December. Warjiyo is signalling patience as Southeast Asia’s largest economy faces the risk of twin deficits in its budget and current account at a time of increased uncertainty. Investors continue to scrutinise the country’s leadership transition, wary of higher debt and budget deficit levels under the incoming administration of president-elect Prabowo Subianto

While lower inflation and steady growth prospects provide scope for easing, policymakers will look at the Fed’s rate path, Treasury yields and the dollar’s strength in its decision, the governor said, underscoring caution on capital flows that could affect the rupiah.

Risks are emerging from growing uncertainty about fiscal sustainability,” said Josua Pardede, chief economist at PT Bank Permata. Concerns over twin deficits and a wider budget gap could “trigger risk-off sentiment, potentially limiting capital inflows and jeopardising rupiah stability”, he said.

The currency closed 0.5% up to 16,100 rupiah per dollar on Wednesday, gaining 1.7% this month. It should strengthen further given Indonesia’s strong fundamentals, Warjiyo said, suggesting that it could pare the 4.4% depreciation so far this year.

The central bank will keep intervening in the FX market to counter any renewed volatility, as well as continue to issue high-yielding securities to lure more foreign inflows, Warjiyo said. Inflation is seen to stay within BI’s 1.5-3.5% target for this year and next.

"Two out of three boxes are already ticked in favour of a BI cut — the policy rate is already considered by BI to be too tight for domestic demand and it sees inflation on track to remain within the 1.5-3.5% target. The last hurdle is a convincing rupiah recovery — and this is starting to come into view with the Federal Reserve now looking close to beginning its own rate cuts," said Bloomberg Economics Asean economist Tamara Mast Henderson/

There appears to be little urgency to ease with the economy expected to post strong growth in the second half of this year, buoyed by government stimulus and the export recovery. Bank lending also grew 12.4% in the second quarter, above the 2024 target of 10-12%, as households see higher incomes and corporates seek working capital.

“While risk sentiment has recently been on the upside and the USD-IDR has come off quite a bit, there can still be jitters in the months ahead. We will be getting deeper into the US election season and in particular, volatility and the greenback historically can tend to climb from August onwards,” said Alan Lau, a currency strategist at Malayan Banking Bhd.

Bank Indonesia will likely wait on the Fed’s cue before making its own move, according to Frances Cheung, a strategist at Oversea-Chinese Banking Corp. Yield differentials between the US and Indonesia remain compressed, and domestic demand may cap Indonesia’s government bond yields at levels not appealing enough for foreign investors, she said.

The central bank governor’s outlook on Fed’s rate cut timing is more sober than the market. “We don’t dare to see a Fed funds rate cut in September, even though the market is starting to see it.”

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