[JAKARTA] In a widely expected move, Bank Indonesia (BI) held the key interest rate at 6 per cent during its monthly meeting on Wednesday (Mar 20) to maintain foreign exchange stability amid a narrowing trade surplus and widening current account deficit.

Since last October’s hike, the central bank has kept interest rates on hold for five consecutive months.

The lending facility and deposit facility rates remain unchanged at 6.75 per cent and 5.25 per cent, respectively.

Central bank governor Perry Warjiyo said he remains hopeful about reducing policy rates later this year. He added that this was only likely if the rupiah stabilises and inflation moderates, and also while BI awaits the US Federal Reserve’s rate-cutting cycle this year.

“We (expect) the Fed will maintain patience until the second half of this year. In the meantime, our primary focus is on maintaining inflation at target levels and stabilising the rupiah,” Warjiyo said on Wednesday.

The country’s headline inflation rose to 2.8 per cent year on year in February from 2.6 per cent the month before. This was led by an 8.5 per cent spike in food prices due to supply disruptions. Core inflation, excluding food and energy, stayed at 1.7 per cent. BI has set an inflation target of 1.5 to 3.5 per cent this year.

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Despite uncertainty over last month’s presidential election, Warjiyo said that investors still view Indonesia as an opportunity regardless of who comes to power. In the year to Mar 18, the country drew US$1.4 billion in foreign capital inflows, primarily from portfolio investments.

DBS senior economist Radhika Rao expects the central bank to keep the benchmark rate steady in H1 2024 and start loosening its monetary policy stance later this year.

“While our end-year forecast for the BI rate remains at 5.75 per cent (from 6 per cent currently), the start of the easing cycle is likely to lean towards late Q3 2024 rather than mid-year,” she said.

The Indonesian rupiah has slid 2.02 per cent in the year to date. Pundits say it will remain vulnerable to further depreciation in H1 2024, given the forecast of a widening current account deficit in Q2 and particularly in light of the global economic slowdown.

Indonesia’s once-strong trade surplus has gradually decreased due to declining exports, which have been affected by weak demand and significantly lower prices for crucial commodities such as crude palm oil and coal.

After reaching a peak of around US$7.6 billion in 2022, the trade surplus of South-east Asia’s largest economy narrowed to US$870 million last month. Analysts say this raises the probability of Indonesia’s current account slipping into deficit this quarter.

Although trade disruption has weakened export demand, economists Satria Sambijantoro and Drewya Cinantyan from Bahana Sekuritas believe this may not be the case for long. They cited the weak export of Indonesian commodities in February as a one-off blip caused by Chinese New Year’s manufacturing inactivity. 

They also expect the rupiah to rebound and reach 15,450 against the US dollar towards the end of Q2.

“Tactically, we remain bullish on the rupiah despite Indonesia having just posted its weakest trade surplus in nine months,” wrote Satria and Drewya in a note.