Indonesia may see tighter monetary policy in 2022: Fitch Solutions

INDONESIA is likely to see a tighter monetary policy in 2022 to support the country's slow economic recovery from the Covid-19 pandemic, according to a report by Fitch Solutions Country Risk and Industry Research released on Thursday (Dec 16).

This comes on the back of Bank Indonesia's (BI) announcement that it would be keeping the benchmark 7-day repurchase rate unchanged at 3.5 per cent for the 10th consecutive month.

Fitch Solutions said the decision made by BI to keep the policy rate on hold was in line with its expectations, with the Indonesia central bank holding on to the view that monetary policy is adequately supportive for the country's current economic environment.

Indonesia's economy continues to face pandemic-related risks, with just 38.2 per cent of the total population having had 2 vaccine doses as at Dec 14 - below the global average of 46.6 per cent. While movement restrictions implemented in the country between July and August to mitigate the Delta variant outbreak have abated, the emergence of the new Omicron variant will be a source of downside risk for Indonesia.

In its latest policy statement, BI noted that the Indonesian economy will stage a slow recovery in the fourth quarter of 2021 and in early 2022; as such, the country will not need further monetary policy support at this stage.

The central bank has also noted that the current monetary policy mix, which includes keeping the policy rate at a record low and purchasing government bonds from the primary market to help partly finance the government's fiscal balance, has not disturbed the rupiah's stability against the US dollar.

This could be attributed to the strong performance of Indonesia's external sector, with the current account balance posting one of the narrowest deficits in history, estimated by Fitch Solutions to be 0.1 per cent of GDP (gross domestic product) in 2021.

According to data from BI, foreign exchange reserves stood at US$145.9 billion as at end-November, which was enough to support 8.3 months of imports and interest payments.

Fitch Solutions retained the view that BI will look to raise the benchmark rate by 50 basis points in 2022, as it expects the Federal Reserve and central banks elsewhere to turn more hawkish in the new year.

"For Indonesia, the direction taken by the US Federal Reserve is especially important given the country's large dependence on external financing," Fitch Solutions wrote.

It also highlighted a considerable rise in price pressures for Indonesia and forecast annual average inflation to spike to 3.5 per cent in 2022, up from 1.6 per cent in 2021.

"We believe that stronger domestic demand as well as delayed effects of higher global energy and food prices, will push up inflation in the archipelago, eventually requiring BI to change its policy stance," Fitch Solutions added.

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