22-8-2023 (JAKARTA) In a recent Reuters poll, Bank Indonesia is expected to maintain its key interest rate at 5.75 per cent for the seventh consecutive meeting, a decision likely to hold for the remainder of the year. This move comes as Indonesia’s inflation rate reached a 16-month low of 3.08 per cent in July, comfortably within the central bank’s target range of 2 per cent to 4 per cent. The primary focus for the central bank has now shifted towards ensuring the stability of the rupiah currency, according to analysts.
Of the 34 economists surveyed from August 14th to 21st, all but one anticipated that Indonesia’s central bank would keep its seven-day reverse repurchase rate at 5.75 per cent during its Thursday meeting, with one economist expecting a 25 basis-point hike.
Radhika Rao, a senior economist at DBS Bank, commented, “Inflation has evolved along our projected path, but the central bank’s focus has shifted to rupiah stability to contain imported inflation and mitigate contagion risks from global uncertainties.” She noted that recent months had seen slowing exports, a reduction in foreign exchange reserves, and a stronger dollar impacting the rupiah, which had previously made gains in the first half of the year.
Rao added, “The authorities have maintained that they prefer to address FX volatility through intervention efforts rather than further tightening moves.” Bank Indonesia intervened last week to reduce volatility in the rupiah, which had fallen to its weakest level since March. Concerns had arisen that higher U.S. Treasury yields might trigger capital outflows, reminiscent of the events in 2013 when the rupiah lost more than a quarter of its value.
Looking ahead, nearly 60 per cent of the economists who provided forecasts for the coming period (16 out of 28) predicted that Bank Indonesia would maintain rates at 5.75 per cent through the end of 2023. Eleven economists expected at least one quarter-percentage point cut by that time, and one anticipated rates rising to 6.00 per cent.
Similar to many of its Asian counterparts, Bank Indonesia was expected to begin rate cuts in the first quarter of 2024. However, there was a divergence of opinion regarding the extent of these cuts.
Approximately 40 per cent of respondents (nine out of 23) predicted a 25 basis-point rate cut to 5.50 per cent in the first quarter. Six economists expected rates to decrease to 5.25 per cent, one forecasted rates at 5.00 per cent, and three anticipated rates falling to 4.75 per cent.
Lavanya Venkateswaran, senior ASEAN economist at OCBC Bank, noted that “as the weakness in China continues, it will be a drag on Indonesia’s growth.” She added that Bank Indonesia would likely “try and support growth as we go towards the end of this year.”
Median forecasts from a smaller sample indicated that Bank Indonesia would reduce its benchmark rate to 5.25 per cent and 5.00 per cent in the second and third quarters of the next year, with a further decrease to 4.75 per cent in the final quarter.
