Bank Indonesia to deliver policy rates decision as capital market reels from chaos

JAKARTA: Indonesia's central bank is expected to weigh a capital market rout and pressure on the rupiah against economic growth prospects when it decides interest rate policy on Wednesday, with a slim majority of analysts predicting the bank would stand pat.

Analysts surveyed by Reuters from October 13-19 were nearly evenly split about whether Bank Indonesia would hold or hike rates. Fifteen out of 29 were expecting it to keep the benchmark at 5.75 per cent, while 13 predicted a 25 basis point (bps) hike and one saw a 50 bps increase.

In a departure from its usual programme, the central bank has brought forward Wednesday's policy rate press conference to 1330 local time (0630 GMT), 30 minutes earlier than usual, to accommodate Governor Destry Damayanti's schedule, it said, without providing details.

In recent days, the rupiah has come under pressure again after MSCI's warning last week that it could move Indonesian equities to "standalone" market status triggered a heavy market selloff.

Indonesia's bourse had a combined two-session fall that was steeper than any during the 1998 Asian financial crisis.

'COMPETING POLICY PRIORITIES'

The rupiah was trading flat on market opening Wednesday. It remained this year's worst-performing emerging Asian currency, having lost more than 7.0 per cent against the US dollar.

The central bank raised rates by 100 bps in three moves between May and June to defend the rupiah, which hit an all-time low in June, weighed down by cooling investor sentiment over Southeast Asia's biggest economy, but it has since kept rates unchanged.

Analysts and investors have been concerned by fiscal sustainability amid President Prabowo Subianto's populist spending plans and expensive fuel subsidies straining the national budget, as well as worries over central bank independence.

Economists at the University of Indonesia's Institute of Economic and Social Research said they expected the central bank to keep rates unchanged but underlined its preparedness to respond should pressure on the rupiah intensify.

Mounting external and domestic pressures, from US monetary tightening to a pickup in inflation rate, "leave Bank Indonesia facing competing policy priorities, as further monetary tightening could help contain exchange rate pressures but weigh on domestic demand," they said in a note.

Citi Research revised its earlier prediction for a pause to a 50 bps hike, expecting the central bank to be pre-emptive to prevent equity foreign capital market outflows from widening to the fixed income market.