Indonesia central bank expected to hold benchmark rate steady at upcoming meeting

[JAKARTA] Indonesia’s central bank will likely leave its benchmark interest rate unchanged for a fifth straight meeting, as the stability of the rupiah remains a key concern.

All 15 economists polled by Bloomberg expect Bank Indonesia (BI) to keep its benchmark policy rate (BI-Rate) unchanged at 6 per cent on Wednesday (Mar 20) following a surprise hike in October last year.

“We still expect BI to hold rates until the end of Q2. There’s no room for BI to cut until the Fed decides to make its first move,” said Irman Faiz, an economist at Bank Danamon on Monday.

Despite the easing pressure on the rupiah, he said that the currency remains susceptible to volatility. Uncertainty surrounding the US Federal Reserve’s interest-rate trajectory continues to overshadow emerging market currencies, most of which have weakened against the US dollar.

The Bank Danamon economist said that the policy rate has been weighing on Indonesia’s trade balance due to depreciation in the rupiah. However, the rupiah, which is down by about 1.3 per cent against the US dollar since the start of the year, has performed better than many of its regional peers.

Sluggish exports and a wider current-account deficit this year could further erode support for the rupiah, requiring the central bank’s vigilance. Last month, Indonesia’s trade surplus was around US$870 million, the smallest trade surplus in nine months as imports came in stronger than expected, while exports slumped.

A NEWSLETTER FOR YOU

Friday, 8.30 am

Asean Business

Business insights centering on South-east Asia's fast-growing economies.

Sign Up

The inflation rate has stayed within BI’s target range of 1.5 to 3.5 per cent since July 2023, with the bank’s 250 basis-point rate-hiking cycle between August 2022 and October 2023 helping to keep price pressures in check. South-east Asia’s largest economy recorded 2.75 per cent inflation in February this year.

While overall consumer prices remain within target, the authority is anticipating persisting inflation risks as food prices are now on the rise.

Some economists warn continuing supply disruptions due to El Nino, along with rising demand due to to the Muslim fasting season of Ramadan, could stoke food costs and put this year’s inflation target at risk.

Economists also flag several downside risks that could potentially disrupt Indonesia’s economic growth and rupiah stability. “Prolonged and broader geopolitical tensions, weaker demand from China and Japan, especially for coal and crude palm oil commodities, as well as a slower disinflation pace in the US, could delay the timing of Fed rate cuts and consequently BI’s start to its rate-cutting cycle,” said UOB’s economists in a recent note.

In a business forum earlier this month, central bank governor Perry Warjiyo said that Indonesia’s economy is strong but it is important to remain vigilant because of global uncertainty. He has repeatedly said that the country has room to loosen monetary policy, likely in the second half of this year, as global uncertainty has begun to ease and the Fed is also expected to cut rates by then.

BI’s stance differs significantly from that of the Philippines’ central bank, as it has ruled out rate cuts anytime soon due to upside inflation risks and has signalled that borrowing costs will remain higher for longer.

With rising prices of food staples and transportation costs, Bangko Sentral ng Pilipinas governor Eli Remolona said that the central bank wants to be certain inflation will settle comfortably within its 2 to 4 per cent target range.