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JAKARTA: Indonesia’s central bank left its key rate unchanged at a record low on Thursday, but said it would raise interest rates on other short-term debt, helping the money market return to pre-pandemic normality.

Bank Indonesia (BI) said the current level of its benchmark seven-day reverse repurchase rate, 3.50 percent, remained consistent with the low core inflation forecast and the impact of the global economic slowdown on the domestic economy.

BI is one of the few major Asian central banks that have not raised interest rates from the level of the pandemic. The decision not to move them on Thursday was predicted by most analysts polled by Reuters.

“Even though we decided that the BI rate would remain at 3.50 percent, we are accelerating normalization or monetary policy response,” Governor Perry Warjiyo said at an online news conference.

BI will raise money market rates for maturities longer than seven days, strengthen currency intervention to contain imported inflation and sell some of its large holdings of government bonds, a move that will drive bond yields higher, Warjiyo said. He described these as preventive and forward-looking measures to limit inflation risks.

While the seven-day key rate remains stable, the central bank will use open market operations to raise rates on instruments with maturities from two weeks to one year, the governor said. Currently, all yields up to and including one year are close to the key rate, he noted.

Growth in Southeast Asia’s largest economy would be biased towards the lower end of BI’s estimate of 4.5 to 5.3 percent, as slowing global economic growth could curb exports, while higher inflation would affect private consumption, he said.

The forecast for headline inflation at the end of 2022 was raised to 4.5 percent to 4.6 percent, from 4.2 percent earlier, but Warjiyo said core inflation would remain within BI’s target range of 2 to 4 percent.

Many central banks around the world have raised interest rates to cope with rising inflation.

The European Central Bank will discuss whether to raise interest rates by more than 50 basis points later on Thursday, while the US Federal Reserve is expected to announce another sharp rate hike next week.

Analysts have warned BI that keeping interest rates unchanged will widen differentials with other countries, making Indonesian assets less attractive to foreign investors and putting downward pressure on the rupiah.

Warjiyo said the rupiah should essentially strengthen as exports have been strong and the current account could be in surplus this year, but he noted that global events are putting pressure on currencies around the world.

The 2022 current account could be between a 0.3 percent surplus of gross domestic product (GDP) and a 0.5 percent deficit, he said. Previously, BI predicted a deficit of 0.5 percent to 1.3 percent of GDP.

ING economist Nicholas Mapa, who had expected a rate hike after other Asian central banks did last week, said BI has “been under much less pressure, both on the exchange rate and on inflation, than its competitors.”

“Given Indonesia’s current account forecast, the bank could be on hold for a little longer,” he said.

Damhuri Nasution of BNI Securities expected BI to raise its key rate by 25 basis points next month to respond to rising inflation expectations.

During the COVID-19 pandemic, BI cut its key rate by 150 basis points and injected money into the financial system, including buying bonds directly from the government. It started to settle all that with gradually increasing reserve requirement ratios starting in March.

Indonesia’s central bank holds key rate, will raise longer short-term rates – UK Time News

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