Indonesia's central bank left its main interest rates, including the benchmark BI rate, steady and repeated that it considers the rupiah currency to be undervalued and it "will continue to intervene on the market in order to stabilize the rupiah in accordance with its fundamental value."
Bank Indonesia (BI), which cut its rate by 25 basis points in February, added that inflation in July was lower than the historical norm during the last four years of Ramadan and repeated that it still expects to achieve its inflation target of 4.0 percent, plus/minus 1 percentage point, helped by central and local measures to control inflation.
Indonesia's headline inflation rate was steady at 7.26 percent in July from June while core inflation eased to 4.86 percent from 5.04 percent, a level the BI said was low in comparison to its historical trend and in line with anchored inflation expectations and economic moderation.
The BI's decision to maintain its rates, including the BI rate at 7.50 percent, was widely expected and follows a statement by Deputy Governor Perry Warjiyo on Aug. 4 that the central bank doesn't expect to lower its rates in the near future as this would be counterproductive given the risks to the rupiah and abundant liquidity in the banking sector.
The rupiah has been depreciating since April 2014 but the pace of its decline picked up last week, triggering a statement by the BI on Aug. 12 in which it said the rupiah was undervalued and the central bank would "continue to intervene on the foreign exchange market in order to stabilize the rupiah."
The BI said today that the "rupiah depreciated primarily on the back of external sentiment" falling by 2.47 percent in the second quarter against the U.S. dollar as pressure on its "escalated due to investor anticipation of the proposed FFR hike in the United States along with quantitative easing implemented by the ECB and the ongoing fiscal negotiations in Greece."
In addition, demand for foreign currency to service debt and disburse seasonal dividend payments had "surged" during the second quarter with some of that offset by positive sentiment from S&P's affirmation of a decision to raise Indonesia's outlook to positive from stable and a trade surplus.
The rupiah was quoted at 13,801.7 to the dollar today, down almost 10 percent this year.
Bank Indonesia issued the following statement: