Bank Indonesia nears end of rate-hike cycle but poised to deliver 25 bps interest rate hike: poll
BANK Indonesia (BI) will deliver another 25 basis points interest rate hike on Thursday (Jan 19) as it tries to bring inflation under control without having a big impact on economic growth, a Reuters poll of economists forecast.
Inflation has been largely cooling since September, but December’s reading of 5.51 per cent was still above the central bank’s target range of 2 per cent to 4 per cent established in 2005.
With a slower pace of rate hikes predicted from the US Federal Reserve this year, the pressure on the rupiah – which lost around 10 per cent against the dollar in 2022 – is expected to subside, providing room for BI to scale down its pace of tightening.
Nearly 80 per cent of economists (23 out of 29) in the Jan 9-16 poll expected BI to hike its benchmark seven-day reverse repurchase rate by 25 basis points to 5.75 per cent at its Jan 19 meeting. The remaining six predicted no change.
“With inflation past its peak, and the Fed expected to dial down its rate hike cycle, the urgency to undertake aggressive rate increases in Indonesia has also eased,” wrote DBS economist Radhika Rao.
“With the currency yet to participate in the regional currency rally and inflation above the official target, BI has opted to maintain a tightening bias but downshift to incremental and less forceful increases of 25 basis points.”
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Softer approach
The survey predicted BI taking a softer approach with rates, with no clear majority on where rates would peak.
Half of the respondents who had a view expected Indonesia’s policy rate to reach 6 per cent or higher by end-March, a quarter point higher than in a December poll.
However, median forecasts showed the benchmark key policy rate topping out at 6.00 per cent and staying there until end-2023, suggesting BI was near the end of its rate hike cycle.
“Domestic inflation dynamics remain reasonably benign and do not warrant outsized rate hikes. Although headline and core inflation edged up in December, the latest weekly survey suggest overall inflation softened at the start of 2023,” noted Khoon Goh, head of Asia research at ANZ. “Overall, we expect the central bank to match the Fed with two 25 basis-point hikes in Q1 2023 given its FX stability mandate.”
The survey showed inflation was expected to average 4.1 per cent this year and then fall to 3 per cent – the mid-point of BI’s target range – by the end of 2024.
While an export boom helped Indonesia’s economy last year, economists expected growth to moderate as tighter monetary policy across the world weighs on global demand.
Indonesia’s economy was expected to grow 4.8 per cent this year and 5 per cent in 2024, slower than the predicted 5.3 per cent for 2022.
“Having frontloaded a sizeable degree of rate hikes we think falling inflation and slower growth are likely to prompt BI to conclude its tightening cycle in the first quarter of 2023,” said Shivaan Tandon, an emerging Asia economist at Capital Economics. REUTERS
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