(Bloomberg) -- Indonesia’s next monetary policy move will remain data-driven, according to Governor Perry Warjiyo, even as last month’s rate hike showed early gains in luring foreign funds and bolstering the rupiah.

Bank Indonesia, whose key mandate includes currency stability, left the BI-Rate steady at 6.25% on Wednesday — a decision expected by all 38 economists surveyed by Bloomberg. Warjiyo earlier this month had signaled standing pat, citing how the surprise April tightening halted outflows and shored up the rupiah.

The currency remains stable and is expected to strengthen, buoyed by higher yields and strong prospects in Southeast Asia’s largest economy, Warjiyo said at a briefing. Inflation was seen to stay within the 1.5%-3.5% target range, while the forecast for economic growth was kept at 4.7%-5.5% for 2024.

With Indonesia’s currency gaining 1.7% this month to become among the best performers in the region, there’s less pressure on the central bank to do more on the rate front. However, any hawkish signal from the Federal Reserve could quickly turn the tide for the rupiah, which has lost 3.7% so far this year.

Bank Indonesia remains watchful as elevated US inflation could keep the Fed’s rate higher for longer, with the first 25-basis point cut only materializing towards the year-end, the governor said. Geopolitical tensions are another risk on the radar, he said.

“Such conditions demand a strong policy response to mitigate the adverse impact of global spillovers, including in Indonesia,” Warjiyo said, adding that BI’s policy direction remains to be “data-dependent.”

The cautious tone underlines BI’s vigilance as sharp currency swings have scuppered its earlier plan for an extended rate pause and a potential cut by the second half of this year. Neighboring Philippines saw the peso punished after its central bank chief’s sudden dovish turn this month.

Both the yield on the five-year sovereign bond and the rupiah held declines after the decision, with the currency among the worst performers in emerging Asia on Wednesday.

What Bloomberg Economics Says...

“With the US presidential election drawing nearer and tensions between Iran and Israel now in unchartered territory, risk aversion and downward pressure on the rupiah could intensify. Even so, our base case is Bank Indonesia has reached the peak of its tightening cycle and could start to reverse course by year-end. Its rate hike in April — and willingness to deliver more if needed — are also supportive.”

— Tamara Mast Henderson, economist

For the full note, click here

BI will keep intervening in the spot and domestic non-deliverable forward markets to ensure currency stability. It could resort to bond-buying when there are heavy outflows to stem an “excessive yield increase” though it currently sees no need for purchases, Warjiyo said.

The central bank will also continue to sell securities to help bring in more inflows, with its above-7% premiums proving “attractive” to investors. Outstanding rupiah and dollar notes stood at over 500 trillion rupiah ($31 billion) and $2.1 billion, respectively, as of May 21.

Warjiyo pushed back against concerns that this strategy tend to crowd investors out of other assets. Loan growth was over 13% in April, the fastest pace in five years, BI said.

BI’s surprise hike last month also made Indonesia’s debt more attractive to investors, with global money managers investing more than $900 million into the nation’s bond market in May, putting the nation on track for its first monthly net inflows this year.

Still, Indonesia’s external balance has deteriorated with the current account falling into a deeper deficit and foreign exchange reserves dwindling by over $10 billion so far this year, underscoring vulnerabilities to the currency.

--With assistance from Norman Harsono, Tomoko Sato, Yudith Ho and Malavika Kaur Makol.

(Updates with more detail from central bank briefing.)

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