BI holds rate, sees little exposure to US banking woes
Bank Indonesia (BI) has kept its key interest rates unchanged for the second time in a row, as
expected by most analysts.
Following its monthly policy meeting on Thursday, the central bank also said there was almost no
direct impact on Indonesia from last week’s closure of three banks in the United States, but the
uncertainty caused in global financial markets may dampen the rupiah’s exchange value.
BI announced that the benchmark rate would remain at 5.75 percent in March, the level it reached
in January after being raised by a cumulative 225 basis points (bps) since August last year, while
the deposit and lending facility rates were kept at 5 percent and 6.5 percent, respectively.
The decision was in line with forecasts of Moody's Analytics, Bank Mandiri and Permata Bank.
BI Governor Perry Warjiyo explained that core and headline inflation figures had both dropped
faster than expected and expressed confidence that core inflation would stay between 2 and 4
percent in this year’s first half, while consumer price index (CPI) growth would come down to fall
into that same target range by the end of this year.
Statistics Indonesia (BPS) announced earlier this month that core inflation had eased to 3.09
percent in February, dropping from 3.27 percent in January. However, the headline figure of
annual CPI growth increased to 5.47 percent year-on-year last month, up from 5.28 percent in the
preceding month, driven by a 7.62 percent rise in volatile food prices.
"Volatile food inflation [increased] last month due to rice prices, but we're entering harvest season,
so it will be under control. CPI inflation will get back to below 4 percent on September, when the
baseline effect due to last year’s fuel price hike has gone," Perry said.
Irman Faiz, a macroeconomic analyst at Bank Danamon, believes pressure on the rupiah will
persist but depend largely on the US Federal Reserve’s policy stance to be announced next
“We still see upside risk to BI’s current neutral stance. We reiterate our view that BI has room for
another 25 to 50 bps increase should these risks materialize,” Irman said in a statement on
SVB failure no direct effect
At the same event, Perry said there was "almost zero" direct impact on Indonesia's banking
industry from the recent closure of three US banks.
The statement echoed assurances from the Office of the Coordinating Economic Minister on
Monday that the collapse of Silicon Valley Bank (SVB) would have no impact as its transactions
with Indonesian financial institutions were miniscule.
The BI governor attributed the collapse of the three US lenders to a concentration risk with many
depositors working in tech start-ups, a valuation risk with the bank’s investment in government
bonds, and an imbalance of liquidity that triggered a bank run.
"Over the weekend, the US government moved quickly to take over those banks and contain the
problem," Perry said, adding that he tried to follow the news closely and assess the situation
along with other members of the Financial System Stability Committee (KSSK).
Their conclusion, according to Perry, is that the majority of Indonesian banks do not have
Perry said some local banks still held Indonesian government bonds (SBN) in this high interest
rate environment but added that they had built reserves to cover potential losses and that the
central bank had encouraged them to gradually shift from available-for-sale (AFS) to held-to-
maturity (HTM) bonds.
According to Perry, the central bank has discussed the effect of holding SBN since before the Fed
began increasing its interest rates and has conducted regular stress tests to ensure the stability of
"We became aware [of the risk] from the Financial Services Authority’s monitoring. That's why we
started to change the treatment of government bonds [held by local banks] from AFS to HTM, so
there would be no mark-to-market effect and negative valuation," Perry stated.
Indonesian banks' capital adequacy ratio (CAR), at 25.88 percent in January, could serve as a
"cushion" for banking sector liquidity, he explained.
However, Perry said the central bank was not letting its guard down as the US banking crisis may
impact investor perceptions.
"We have to be alert to changing [global investor] expectations. Their perception is so important,
[as we have seen in the] Credit Suisse case," Perry said.
While the central bank said it logged US$3 billion in net capital inflows this year as of March 14, it
admitted there had been an outflow in March due to "the uncertainty in the global financial market".
Fikri C. Permana, a senior economist at KB Valbury Securites, said capital outflow should be
anticipated following SVB's collapse as investors moved money to safe-haven assets.
Perry said the central bank would continue to stabilize the rupiah, including through market
intervention, and would take advantage of a policy implemented this month to get exporters to
keep more of their proceeds in the country.
"Fundamentally, the resilience of Indonesia's financial sector is strong. We always coordinate with
other KSSK members to ensure everything is under control," Perry stated.
Source: The Jakarta Post