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Indonesia to maintain policy rate as Prabowo victory reduces uncertainty

Indonesia to maintain policy rate as Prabowo victory reduces uncertainty


(Bloomberg) — Indonesia's central bank will likely keep its benchmark interest rate steady as Prabowo Subiantos' impending victory in the presidential race removes the uncertainty of a lengthy election process, even if the rupiah remains volatile.

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The 30 economists polled in a Bloomberg survey expect Bank Indonesia to keep the BI rate at 6% for a fourth straight month on Wednesday, a week after the election of President Joko Widodo's successor which ends his ten-year term in October. Prabowo claimed victory on February 14, citing independent pollsters.

Defense Minister Prabowo and his running mate Gibran Rakabuming Raka, the eldest son of outgoing President Jokowi, received almost 60% of the vote, according to the latest official tally from the electoral body which will announce the results by March 20 . If the trend continues, Prabowo would have more than enough votes to cross the 50% threshold and win and avoid a runoff in June.

Prabowo's likely victory means that financial markets will not remain in uncertainty for long. His promise to continue Jokowi's policies is expected to boost investor confidence in Southeast Asia's largest economy and help shore up the currency as traders backed away from betting on an anticipated Federal Reserve rate cut after strong US jobs and inflation data this month.

Buoyed by its political stability, the central bank will likely focus on global developments and maintain an extended pause, said Radhika Rao, an economist at DBS Group Holdings Ltd.

Here's what to watch at the pricing briefing at 2 p.m. local time on Wednesday:

Rupiah vulnerable

The rupee failed to find solid ground despite prospects of a first-round election. The currency has fallen 1.7% against the dollar this year, underperforming a broader gauge of emerging market currencies.

Indonesia has seen net outflows of foreign capital so far this year, as markets push the Fed to scale back its bets through June, compared with a previously estimated four in five chance of an easing in March, on based on data compiled by Bloomberg.

Indonesian policymakers will likely continue to use tools such as rupee securities or the SRBI to attract capital inflows that could strengthen the currency, reducing the need for the BI to intervene in the market and deplete its reserves exchange. Bank Indonesia sold 96 trillion rupiah ($6.1 billion) worth of SRBI in January, the highest amount since the instrument was introduced in September.

Global risks, especially related to geopolitics and the Fed's policy stance, will continue to determine the dynamics of financial markets and ultimately the BI's monetary policy, said Dian Ayu Yustina, economist at PT Bank Mandiri .

Transition period

After the elections, investors will focus on the smooth transfer of power.

Reports of the possible resignation of several ministers in Jokowi's cabinet, including Finance Minister Sri Mulyani Indrawati, shook markets in January. Prabowo's expensive campaign promises also raised concerns about the future of Indonesia's fiscal policy, which under Indrawati was kept at a low deficit and debt ratio.

The next challenge for Prabowo-Gibran is how to maintain political stability during the leadership transition period, Enrico Tanuwidjaja and Agus Santoso, economists at United Overseas Bank Ltd., wrote in a note.

Indonesia's economy has shown some resilience despite borrowing costs near their highest level in five years. Gross domestic product grew 5% last year, supported by consumption, investment and government spending. With Bank Indonesia hinting that it is possible to cut rates only in the second half of the year, the strength of domestic demand will largely depend on government programs to boost spending.

–With help from Tomoko Sato and Matthew Burgess.

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