Pressure on Bank Indonesia to raise rates on Q3’22

Bengaluru, Feb. 8 (BNA): Indonesia’s central bank will raise interest rates faster than it was thought just one month ago as concerns grow over rupiah weakness as the Federal Reserve prepares to raise interest rates next month amid rising inflation in the United States.

But unlike many major economies, Indonesian inflation has remained largely moderate, rising only to 2.18% in January after spending most of the past two years below Bank Indonesia (BI)’s target range of 2%-4%, Reuters reported.

All 26 economists surveyed February 2-7 expected the BI to maintain its record seven-day reverse repo rate at a record low of 3.50% at the conclusion of Thursday’s policy meeting.

More than a third of respondents, 8 of 20, expected a rise as early as the next quarter, but the averages in the latest survey forecast a 50 basis point tightening in July-September, compared to a 25 basis point increase in the third and fourth quarters in January. vote.

“If inflation is picking up and external pressure is stronger than previously expected, they need to adjust their rates as well by 50 basis points in the third quarter,” said Erman Weiss, economist at Danamon Bank.

Although the median forecast saw no movement in the last quarter, economists’ expectations were on edge.

Eight of the 17 respondents saw the BI key rate at 4.25% or higher – two of them said 4.50%. Six more said 4.00% and two said 3.75% and one participant said BI will keep it on hold all year long at the current 3.50%.

But a lot will depend on how the Indonesian rupiah performs. The currency has been fairly stable this year, depreciating just 1% against a stronger dollar. A Reuters poll six weeks ago showed the rupee is trading around current 12-month levels.

ING economists have pointed to “stepping points” for BI’s shift from an accommodative stance to one in which it focuses on price pressure “that would lead to acceleration of inflation along with devaluation pressure of the Indonesian rupiah associated with Fed tightening.”

Central bankers in emerging markets are watching the Federal Reserve in case its tightening cycle leads to capital outflows.

Southeast Asia’s largest economy expanded 5% in the fourth quarter of 2021, slightly stronger than the average of a Reuters poll. But the recent surge in COVID-19 infections may prompt policymakers to be cautious for now.

MI