Bank Indonesia to hold rates in July, calls for a hike grow louder

BANK Indonesia (BI) is likely to hold rates at a record low on Thursday (Jul 21), but one in 3 economists polled by Reuters expected a 25 basis-point hike to shore up the rupiah currency and guard against capital outflows stemming from aggressive US rate hikes.

Faced with relatively low inflation, Bank Indonesia will wait at least one more month before it joins other central banks in raising interest rates, the latest poll found an unchanged view from a June poll.

Last week, the Philippines and Singapore central banks surprised markets with out-of-cycle monetary policy tightening while Canada delivered a hefty 100 basis-point rate hike.

Although Indonesia's inflation rose to a 5-year high of 4.35 per cent in June, BI remains one of the few Asian central banks not to have lifted rates from a pandemic-induced record low.

In a Jul 11-18 poll, 18 of 29 economists, or around 60 per cent, said the central bank would keep its benchmark 7-day reverse repurchase rate at 3.50 per cent on Jul 21. Eleven expected a 25 basis-point hike.

"Bank Indonesia is expected to leave the benchmark rate on hold this week, citing manageable core inflation numbers and strong trade surpluses providing support to the rupiah," noted Radhika Rao, senior economist at DBS.

Core inflation, which BI said it would focus on more instead of the headline figure, is at 2.63 per cent, well within the 2-4 per cent range. But a few economists expect it to inch closer to 4.0 per cent soon.

"Pressure to raise rates is nonetheless building as aggressive Fed rate hikes spur the dollar index sharply higher," said Rao, who expects the first rate hike in either August or September.

A majority of economists agreed there was more tightening coming and saw rates reaching 4.00 per cent by the end of September. Fifteen of 20 respondents who had a view until the end of the year saw rates hitting 4.25 per cent or higher.

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Among the smaller sample of respondents who had forecasts to the end of next year, 6 of 9 saw rates at 5.00 per cent or higher - back where they were before the pandemic.

The poll showed inflation was expected to average 3.9 per cent this year and slip to 3.5 per cent in 2023, an upgrade from 3.4 per cent and 3.2 per cent predicted in April.

The rupiah currency, meanwhile, has lost around 5 per cent so far this year but has fared much better than nearly all of its peers. Some are concerned that trend may not hold.

"Bank Indonesia's upcoming rate decision is a close call, but we think recent external developments have tilted the odds toward BI finally pulling the trigger," noted Krystal Tan, an economist at ANZ, who expects a 25 basis-point hike.

"Bucking the hawkish trend could risk BI being perceived as a laggard and intensify pressure on the IDR." REUTERS