Bank Indonesia rates on hold for rest of year, cut in Q1 2024: poll
BANK Indonesia (BI) will keep its key interest rate unchanged at 5.75 per cent next week and leave it there for the rest of the year as inflation is set to remain within the central bank’s 2-4 per cent target range, a Reuters poll of economists found.
Headline inflation in South-east Asia’s largest economy eased to a 14-month low of 3.52 per cent in June and core inflation to 2.58 per cent, suggesting BI can hold rates steady, despite expectations policymakers in the US, Britain and the eurozone will hike interest rates further.
With inflation expected to stay within the central bank’s 2-4 per cent target range the focus was now on maintaining the stability of the Indonesian rupiah.
The currency is up about 4 per cent for the year against the dollar but has come under pressure after recent hawkish comments by Fed officials pointing to more US rate hikes, suggesting BI would remain cautious in its monetary policy.
All 31 economists in the Jul 14-19 Reuters poll expected Indonesia’s central bank to hold its key seven-day reverse repurchase rate at 5.75 per cent at the conclusion of its Jul 24-25 meeting.
A strong majority of economists, 20 of 28, forecast BI to hold the benchmark policy rate at that level for the rest of the year, with only eight expecting a rate cut of at least 25 basis points by then.
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“Governor Perry Warjiyo’s latest comments continue to suggest the central bank is wary of cutting its policy rate prematurely, lest this trigger a backlash against the IDR (rupiah) if global risk sentiment sours,” noted Brian Tan, an economist at Barclays.
“This likely would be exacerbated with the trade balance recently turning less supportive for the external accounts, even as renewed focus on the possibility of more rate hikes from the US Federal Reserve will likely keep BI cautious in the near term.”
Indonesia posted an unexpectedly large trade surplus of US$3.46 billion last month, despite weak exports, as imports plunged faster than expected. This has fuelled speculation among investors BI would cut rates before year-end.
But median forecasts in the poll showed a 25-basis-point rate cut to 5.50 per cent in the first quarter of 2024.
Unlike its other Asian peers, BI may be cutting rates earlier, with inflation expected to average 3.8 per cent this year and further decline to 3.0 per cent next year, staying within BI’s 2 per cent to 4 per cent target range.
While exports boosted Indonesia’s economy in 2022, the resource-rich country’s growth was expected to slow this year due to moderating commodity prices and the faltering Chinese economy, the country’s largest trade and investment partner.
Economic growth was forecast at 4.9 per cent this year, down from 5.3 per cent in 2022. It was then expected to rise to 5.0 per cent next year. REUTERS
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