Bank Indonesia policy juggle makes rate moves harder to predict
The central bank has spurned market expectations at half of its 10 policy meetings so far this year
[JAKARTA] Bank Indonesia’s (BI) balancing act between stability and growth has lately led to more surprises than signals for markets, keeping investors on edge ahead of Wednesday’s (Nov 19) interest rate decision.
The central bank has spurned market expectations at half of its 10 policy meetings so far this year, including its decision last month to maintain the key rate. In January and September, BI defied nearly all analyst forecasts by cutting rates.
Bank of America zeroed in on the unpredictability in a Nov 7 note reviewing several years of rate decisions. The central bank surprised three times in 2018, and at most twice in other years, it said.
“When global economic policy uncertainty is high, less predictable central bank decisions could potentially weigh further on investor sentiment,” said Euben Paracuelles, a Nomura Holdings economist who uses his own daily gauge of external risks such as the US dollar index, US Treasury yields and market volatility to assess BI’s likely response.
Analysts largely expect BI to pause yet again on Wednesday to avoid further eroding support for the rupiah, the worst-performing currency in Asia this year. A Bloomberg survey shows 28 of 33 economists seeing the benchmark BI-Rate staying at 4.75 per cent, while the rest predict a 25-basis-point cut.
Once focused narrowly on maintaining rupiah and price stability, BI’s mandate was formally expanded in late 2022 to also include supporting sustainable growth. Balancing these responsibilities has become tougher in the face of global economic turbulence and the need to align closely with President Prabowo Subianto’s growth agenda.
“BI has had to pivot quickly between supporting growth and defending rupiah stability, resulting in reactive rather than pre-signalled moves, complicating market alignment with forward guidance,” said Krystal Tan, an economist at Australia & New Zealand Banking Group.
The rupiah has dropped 3.8 per cent against the US dollar this year, while neighbouring Malaysia and Thailand have seen their currencies gain by at least 5 per cent.
BI, like other central banks, including the US Federal Reserve, is under pressure to support government efforts to accelerate economic growth.
In the region, the Bank of Thailand and the Bangko Sentral ng Pilipinas have delivered surprises in 40 per cent of their rate meetings this year as monetary authorities loosen policy to differing degrees, according to OCBC economist Lavanya Venkateswaran.
BI will likely cut by a quarter-point on Wednesday, she said, adding that its focus on growth has been “prudent” given well-managed inflation.
“The path for lower rates was well signalled, but the timing of the cuts has been a close call given the volatility in currency moves,” said Venkateswaran. BI, which holds policy meetings every month, also has more wiggle room in terms of timing, she said.
More unpredictable
Some investors remain wary of the possibility BI could change its policy stance again in the near term, BofA Securities analysts Kai Wei Ang and Rahul Bajoria wrote in their report. Even so, softer domestic demand and a slowdown in third-quarter growth mean BI is still expected to keep an easing bias.
Governor Perry Warjiyo on Nov 12 slightly raised BI’s forecast for 2025 growth to above the midpoint of 4.7 to 5.5 per cent, up from 4.6 to 5.4 per cent. But he also reiterated that more rate cuts should be expected to 2026, though the timing and scale of easing will hinge on currency stability and inflation risks.
Even if BI thinks the economy needs a boost, it may not be through a rate cut. When he held rates in October, Warjiyo announced measures aimed at getting banks to pass on lower borrowing costs to their customers.
Nomura expects BI to stand pat on Wednesday, citing the central bank’s increased vigilance over still-elevated external risks. The rupiah weakened by 0.7 per cent against the US dollar this month as foreign capital flight intensified, erasing all of this year’s inflows into government bonds.
The central bank also needs to keep an eye on inflation. Volatile food prices rose 6.6 per cent in October compared to the year before, helping drive the headline inflation rate to its highest level in 18 months. BLOOMBERG
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