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Rupiah Pressure Forces Bank Indonesia Pause
12 Mar
Summary
- Bank Indonesia is expected to hold interest rates steady for the sixth time.
- Rupiah weakness, driven by Middle East conflict, limits policy flexibility.
- Investor concerns over fiscal credibility and central bank independence also weigh.
Bank Indonesia is anticipated to keep its key interest rate unchanged for a sixth consecutive meeting on Tuesday. This decision stems from increasing pressure on the rupiah, significantly impacted by the conflict in the Middle East, which limits the central bank's capacity to enact policy easing.
Despite previous indications of supporting economic growth, Bank Indonesia has maintained a steady policy rate since October. This stance is primarily due to the rupiah's recent depreciation, forcing a focus on currency stability, which is the central bank's main mandate.
Investor sentiment has also been negatively affected by concerns regarding fiscal credibility, specifically President Prabowo Subianto's spending proposals which could widen budget deficits. Additionally, questions surrounding the independence of the central bank have arisen following the appointment of the president's nephew as a deputy governor, contributing to capital outflows.
The rupiah experienced a record low on Monday and has seen a decline this year, further diminishing the likelihood of a rate cut at the upcoming meeting. Most economists surveyed expect the benchmark seven-day reverse repurchase rate to remain at 4.75%. Future projections suggest that at least 70% of economists anticipate a rate cut in the next quarter, though the timing is uncertain.
