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Indonesia holds key rate, warily eyes global economy

JAKARTA, Jan 19 Indonesia's central bank, keeping a wary eye on United States economic policy under a new president and on inflation at home, held its benchmark interest rate steady on Thursday.


Analysts said the chance of Indonesia being able to cut rates any time soon is slim.


The main policy rate was kept at 4.75 percent, as predicted by all 22 analysts in a Reuters poll. It has been at this level since October.


Earlier on Thursday, Malaysia's central bank also kept its key interest rate on hold.


Taking advantage of low inflation rates, a comfortable current account deficit and a largely stable rupiah, Bank Indonesia (BI) cut its key rate six times in the first 10 months of 2016, by a total of 150 basis points.


But many analysts argue room for more rate cuts has shrunk with rising global uncertainty and more worries that U.S. rate hikes by the Federal Reserve will pull more money out of emerging markets.


"Should BI lower interest rates further as the Fed begins to lift up short-term rates beginning in Q2 2017, the risk premium may not be enough to retain flows in Indonesia," said Trinh Nguyen, senior economist of Natixis in Hong Kong.


"This is why we believe the central bank will be vigilant. And with growth and inflation accelerating, there isn't much impetus for BI to ease this year."


ANZ said it expects BI to keep the policy rate unchanged "for an extended period of time. Even if growth undershoots, whether any monetary easing will take place in 2017 will depend crucially on the actual inflation trajectory."


Gundy Cahyadi, economist at DBS in Singapore, said he sees a possibility Indonesia will raise rates this year. "Risks to inflation are tilted to the upside," he said. "And we continue to see markets underestimating Fed rate hike intentions this year."


BI on Thursday said it will watch the direction of U.S. fiscal and trade policy under Donald Trump, who will be sworn in as president on Friday.


Indonesia's 2016 rate cuts have had limited impact as loan growth remained relatively slow compared with its historical trend. Some analysts said recovery in economic growth stalled in the second half of last year.


The Indonesian government plans to remove some subsidies for liquefied petroleum gas and electricity will also add to domestic price pressures.


Consumer prices rose 3.02 percent during 2016, the slowest pace since 2009. This year, BI said inflation rate likely will be at least 4 percent this year.


BI has said GDP growth in the fourth quarter likely slowed to 4.97 percent, bringing full-year 2016 expansion to 5 percent. This year, it expects growth of 5.0-5.4 percent. 

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