Preventing excessive rupiah volatility is a priority

Amid prevailing uncertainties in global financial markets, Bank Indonesia (BI) has resisted pressure to trim its interest rates to help boost GDP growth. This week's moves in the USD/IDR might have justified BI's decision to keep rates unchanged last month. Sentiment among businesses has been dragged by a weak rupiah more than anything else. It is all the more important that the central bank remains vigilant of risks going forward. 

The persistent monthly trade surplus seen this year has eased some concerns over external financing risks. Not that these have gone away though. On both value and volume terms, export growth is still in the negative this year. The only reason current account (C/A) deficit has narrowed to 2% of GDP is due to a slump in imports. Note how monthly imports are some 30% lower than back in Jan-2014. Given these, the rupiah is still vulnerable to bouts of risk aversion in global markets. 

It is also important to note that BI expects faster GDP growth in 2016. GDP growth is expected to inch higher to 5.2-5.6% next year, on the back of fiscal spending and a recovery in investment growth. That the government seems increasingly tolerant of fiscal deficit trending above 2.5% of GDP is presumably an encouraging sign. Underlying sentiment remains weak in the private sector and only a more aggressive fiscal policy can help to boost growth. For now, BI's role is focused in maintaining financial market stability