Analysts expect Indonesia's monetary policy rate to rise by at least 50 bps this year

ANALYSTS from Fitch Solutions and Maybank Research are projecting hikes in Indonesia's 2022 monetary policy rate after Bank Indonesia (BI) announced it would raise the reserve requirement ratio (RRR) for commercial banks by 300 basis points (bps) from Mar 1, 2022 onwards.

In a research report on Thursday (Jan 20), Fitch Solutions Country Risk & Industry Research projected that a monetary policy rate hike of more than 50 bps will bring the benchmark 7-day reverse repurchase rate up to 4 per cent by the end of 2022.

It believes that the hikes to RRR will tighten financial liquidity in the Indonesian market and therefore, prompt BI's movement away from its current dovish policy stance.

According to the research house, the tighter monetary policy in Indonesia is a result of hawkish policy in the US as the rupiah is sensitive to the stronger US dollar.

Monetary policy decisions in Indonesia are also greatly influenced by external factors that affect the movement of the rupiah because the central bank has a dual mandate that establishes consumer price stability and anchors the exchange rate.

With the potential for more rate hikes in the US, BI could raise the benchmark policy even more than expected, Fitch Solutions stated.

Additionally, Fitch Solutions expects consumer inflation rates to grow at an average pace of 4.2 per cent in 2022, up from the annual average rate of 1.6 per cent in 2021.

The research house is anticipating the rising inflation rates to be driven by increased oil prices and a slightly weaker currency, as well as demand and supply imbalance in the global market due to supply chain disruptions and post pandemic recovery.

"Overall policy tightening will likely carry on in 2023 given the rapid increase and the tendency of the RRR moving ahead of the benchmark rate. We therefore expect a further 100 bps hike in that year," Fitch Solutions added.

Meanwhile, Maybank Research is expecting the BI to tighten its policy rate from Q2 2022 by 75 bps over the course of 3 hikes, which will bring the policy rate to 4.25 per cent at the end of the year.

Similar to Fitch Solutions, Maybank's research team highlights the poor performance of the rupiah against the US dollar and attributes it to the hawkishness of the Federal Reserve.

Maybank also believes that inflation pressures are rising because of increased food and energy costs including oil and fuel.

It expects Indonesia's temporary restrictions on palm oil exports, along with its ban on coal exports since early January, to dampen the country's export momentum and reduce its trade surplus in Q1 2022.

"We think the main inflation risk would be an upward adjustment in retail fuel prices, which are currently around 30 per cent below their commercially viable prices. Raising retail prices by 15-20 per cent could add as much as 1 percentage point to headline inflation, bringing it above the BI's target range of 2-4 per cent," said Maybank Research's analysts.

Maybank also noted that past fuel price hikes had previously led to "sharp inflation spikes and aggressive central bank tightening moves".