Indonesia central bank extends interest rate pause, sees possible easing in H2 2024
[JAKARTA] Indonesia’s central bank kept its interest rates on hold, as widely expected, at the end of its final meeting for 2023 on Thursday (Dec 21). It also signalled that there could be some leeway for monetary easing in the second half of next year.
Bank Indonesia (BI) left the benchmark seven-day reverse repurchase rate at 6 per cent, which was predicted by all 29 economists polled by Bloomberg recently. The rate has stayed at this level since a surprise hike in October.
The move was also consistent with governor Perry Warjiyo’s statement in late November that BI would likely keep borrowing costs at a four-year high for a while more.
On Thursday, Warjiyo said the central bank’s latest decision was in line with efforts to maintain the rupiah’s stability and to mitigate against imported inflation.
The move to maintain rates is “consistent with the focus of pro-stability monetary policy, to strengthen the stability of the rupiah exchange rate, as well as pre-emptive and forward-looking steps to ensure inflation remains under control within the target of 1.5 to 3.5 per cent in 2024”, he said.
Warjiyo noted that how BI acts in 2024 will depend on domestic inflation. He said that the central bank expects to see lower foreign exchange risks in the second half of next year, which will present some room to possibly loosen monetary policy.
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The central bank has hiked interest rates by a total of 250 basis points from August 2022 to October 2023. Its latest rate hike two months ago was made in response to a plunge in the rupiah’s exchange rate amid capital outflows linked to US monetary tightening.
Warjiyo said he expected the rupiah to become more stable in 2024, with the US Federal Reserve expected to cut interest rates by 50 basis points in the second half of next year.
He said BI will continue to monitor a number of risks that could disrupt inflation, including the impact of soaring global energy prices, higher domestic food prices and continued pressure from the depreciation of the rupiah’s exchange rate on imported inflation.
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Headline inflation in Indonesia accelerated to a three-month high of 2.86 per cent in November, still within target but outpacing forecasts. Volatile food inflation rose by a much faster 7.59 per cent.
BI also maintained its outlook for Indonesia’s economy, forecasting an expansion of 4.5 to 5.3 per cent for this year and 4.7 to 5.5 per cent in 2024. The early forecast for 2025 is for growth of 4.8 to 5.6 per cent.
Still, headwinds are expected from weakening global economic growth. Indonesia grew at its slowest pace in two years of 4.94 per cent in the third quarter, as exports shrank and household spending softened.
Analysts from Schroders Indonesia said they saw the potential for BI to reduce its benchmark interest rate in the second half of next year, following the US Federal Reserve’s expected rate cuts.
“A milder current account deficit and manageable inflation are likely to support Indonesia’s fundamentals. When the Fed cuts rates next year, this will clear the path for BI to follow suit,” they said.
Societe Generale economist Kunal Kundu said: “We do not rule out BI bank opting for a rate cut earlier than we have been expecting (in the second half of 2024), if the rupiah and inflation rate remain stable.”
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