20-5-2024 (JAKARTA) Indonesia’s central bank, Bank Indonesia (BI), is anticipated to maintain its key interest rate steady through the next quarter to support the underperforming rupiah. A Reuters poll conducted from May 13 to 17 found that only a slim majority foresee a rate cut in the fourth quarter, which would follow the likely commencement of policy easing in the United States.
Last month, Bank Indonesia unexpectedly increased its seven-day reverse repurchase rate to 6.25 percent, marking the highest level since the instrument became the primary policy rate in 2016. This move was aimed at stabilising the currency. Since the hike, the rupiah has appreciated by over 1 percent, suggesting that the pressure to further tighten has diminished. However, a rate cut remains distant as the rupiah is still down approximately 3.5 percent for the year, marginally better than some other Asian currencies.
All 33 economists surveyed in the poll unanimously predicted that BI would keep the key interest rate at 6.25 percent at the conclusion of its two-day meeting on May 22. Median forecasts indicate that interest rates will remain unchanged through the third quarter, with a potential 25 basis point cut to 6.00 percent anticipated before the end of the year.
Makoto Tsuchiya, an economist at Oxford Economics, noted, “Persistent rupiah weakness means BI’s move is constrained by the dollar’s strength and what the Fed does. We believe the risks are skewed towards a slower start of the rate-cutting cycle.” He added, “We expect BI to continue utilising various policy tools other than the policy rate, including forex intervention. Modest investment growth in Q1 should make BI cautious about over-tightening.”
To support the rupiah, the central bank has been tapping into its foreign exchange reserves, which have decreased to $136 billion, a drop of $4.2 billion in April alone—the largest decline in 11 months. Nevertheless, the risks of the rupiah weakening further remain high due to a hawkish outlook from the U.S. Federal Reserve. The first Fed rate cut is now expected in September but could be delayed if U.S. economic indicators remain strong, affecting BI’s rate strategy.
Among the economists who provided forecasts for the year-end, a slight majority—17 out of 31—anticipated interest rates to be at 6.00 percent or lower, while 14 expected them to remain at 6.25 percent or higher.
“A BI rate cut is highly unlikely given the Fed’s prolonged hold,” remarked Elbert Timothy Lasiman, an economist at Bank Central Asia. “Domestically, there is little change, as BI would actually prefer to ease policy to support flagging growth. What changes is the global landscape, where the market is beginning to price in the possibility of ‘high for longer’ again.”
