Indonesia central bank keeps rates steady, to monitor inflation risks
INDONESIA’S central bank kept interest rates unchanged on Thursday (Nov 23), as expected, noting the benchmark level was adequate to anchor inflation in the next two years and despite renewed volatility in the exchange rate of the rupiah currency.
Bank Indonesia (BI) left the benchmark 7-day reverse repurchase rate unchanged at 6 per cent, as expected by a strong majority of economists polled by Reuters, following October’s surprise rate hike. Its two other policy rates were also kept steady.
BI governor Perry Warjiyo said that the decision was consistent with maintaining the rupiah’s stability and to mitigate against imported inflation, although he added inflationary risks remained, stemming from rising global energy prices and high domestic food prices.
“Going forward, Bank Indonesia will continue to monitor a number of risks that could disrupt inflation, including the impact of high global energy prices, domestic food prices and pressure from the depreciation of the rupiah exchange rate on imported inflation,” the central bank said. BI has been juggling the need to support economic growth with pressure on the rupiah.
“This 6 per cent policy rate is still consistent to make sure next year’s inflation is not higher than 3.2 per cent,” Warjiyo later told a press conference, referring to BI’s 2024 inflation rate prediction. Responding to a question on the need for further tightening, the governor stressed that future rate decisions will be data dependant.
Inflation in October picked up slightly to 2.56 per cent, but remained within BI’s 2 per cent to 4 per cent target range for this year. Inflation will stay within the target range in 2023 and 2024, when the range will be lowered to 1.5 per cent to 3.5 per cent, Warjiyo said.
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The rupiah has been highly volatile against the US dollar in the past few weeks, sensitive to swings in market sentiment about the Federal Reserve’s tightening cycle. It posted its biggest one-day drop since February on Wednesday, but rebounded slightly on Thursday. It gained a touch against the US dollar after BI’s decision to trade at 15,550 at 0815 GMT.
Comments by Warjiyo suggested that BI was done with its rate increases, which have totalled 250 bps since August 2022, although the length of the Fed’s “higher-for-longer” US rates and other global factors may still force a hike, said Enrico Tanuwidjaja, an economist with UOB.
UOB revised down its prediction of BI’s further tightening to one more 25 basis point hike, from two such hikes by the end of 2024’s first quarter.
Capital Economics said that Warjiyo’s comments suggested the end of the bank’s tightening cycle, and predicted a cut next year. “Our forecast is that interest rates will be left unchanged in the near term before a cut in April 2024,” said the firm’s Gareth Leather.
BI kept its outlook for 2023 GDP growth at a range of 4.5 per cent to 5.3 per cent, with spending for general elections in February 2024 seen boosting economic activities going forward. South-east Asia’s largest economy grew at its slowest pace in two years of 4.94 per cent in the third quarter, as exports shrank and household spending softened. REUTERS
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