Bank Indonesia seen reducing rate hikes to modest 25bps on Dec 22: poll

COOLING inflation and a more resilient rupiah currrency is expected to give Bank Indonesia (BI) enough comfort to opt for a more modest quarter-point interest rate hike on Thursday (Dec 22), a Reuters poll found.

Last week, major global central banks including the US Federal Reserve slowed the pace of interest rate hikes as inflation showed signs of peaking while stressing that the fight was not over yet.

Bank Indonesia, which has increased interest rates by 175 basis points so far during the current raising cycle, and was rewarded with lower than expected annual inflation fo 5.42 per cent in November, making a smaller interest rate hike more likely at the next central bank policy review.

Over 90 per cent of economists, 27 of 29, in the Dec 13-19 poll expected BI to hike its benchmark seven-day reverse repurchase rate by 25 basis points to 5.50 per cent at the Dec 22 meeting.

The remaining two forecast a 50 basis point rise.

“(We) did see a bit of a surprise on the downside for inflation, so that may give Bank Indonesia some space to just do the 25 (bps) instead of 50,” said Nicholas Mapa, senior economist at ING who also expects a smaller hike to provide more support to the rupiah currency.

“Given their mandate to provide FX stability, they’re likely to tighten further, but not as aggressively as previously because of the Fed’s downsizing of its own pace of tightening.”

Over 85 per cent of respondents, 19 of 22, who had a long-term view expected Indonesia’s policy rate to reach 5.75 per cent or higher by end-March 2023, a quarter point higher than November’s poll.

Median forecasts showed rates rising to 6.00 per cent in the second quarter but then falling back to 5.75 per cent by end-2023. One-third of respondents, 7 of 21, said rates would end next year at 5.75 per cent, nine said it would be higher than that and five said it would be lower.

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With a slower pace of rate hikes predicted from the Fed, the pressure on the rupiah, which has lost around 9 per cent against the US dollar this year is expected to subside, providing room for BI to scale down its pace of tightening.

“We don’t think domestic inflation dynamics warrant further outsized rate hikes; a more benign external environment should give the central bank some scope to slow the pace of tightening,” noted Krystal Tan, an economist at ANZ.

“We forecast its rate hiking cycle to end in Q1 2023, at a terminal rate of either 5.75 per cent or 6.00 per cent, depending on the amount of pressure on the IDR.” REUTERS