Bank Indonesia to hold rates until second half of 2022 despite hawkish Fed

  • Political decision expected on Thursday January 20 around 07:00 GMT

BENGALURU, Jan 18 (Reuters) – Indonesia’s central bank will wait until the second half of the year before raising rates to support economic growth, although the U.S. Federal Reserve is expected to tighten monetary policy as early as March, according to a Reuters poll.

Bank Indonesia (BI) Governor Perry Warjiyo said at his December meeting that policy normalization will not necessarily follow Fed decisions and interest rates will remain low until inflation rises.

Unlike the United States, where inflation is at a 40-year high, inflation in Southeast Asia’s largest economy has been below the target range of 2% to 4% of the central bank for 19 months, giving it leeway to keep rates stable.

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The 30 economists expected Bank Indonesia to keep its benchmark seven-day reverse repurchase rate (IDCBRR=ECI) at a record high of 3.50% at its January 19-20 policy meeting.

“We still believe BI will keep its key rate at 3.50% this month, given that inflationary pressure remains subdued,” said Josua Pardede, chief economist at Bank Permata.

However, with Fed officials signaling a rate hike this quarter, BI will be under pressure to launch its own tightening cycle soon after to head off currency weakness and potential large capital outflows.

In a Reuters poll from January 11-17, BI was expected to raise the seven-day repurchase rate by 50 basis points in the second half of this year in two steps, to 3.75% in the third quarter and then to 4.00% on the fourth. .

“While the BI may prefer to keep the policy rate stable to support the economy, the central bank could still be forced to hike earlier than expected if a more hawkish-than-expected Fed leads to a substantial depreciation in the IDR,” noted the economists. at Barclays.

The Indonesian rupiah held steady amid an export boom driven by soaring commodity prices and was one of the best performers in emerging Asia last year, depreciating only around 1.5% against the dollar.

Indonesia has recorded a trade surplus since May 2020, but the surplus narrowed in December to its lowest level in 20 months. Economists were also cautious because a government-imposed coal export ban could tip the trade balance into a deficit.

“The trade surplus may have peaked and market volatility may increase as the US Fed reduces monetary support, which could impact portfolio flows to Indonesia,” Krystal said. Tan, an economist at ANZ.

“Overall, an orderly normalization of US policy will likely allow IDR to weather this episode well, but any hasty action to stop inflation could increase market uncertainty.”

The poll also predicted higher inflation, but would remain within the BI target range, averaging 2.9% and 3.1% for 2022 and 2023, respectively.

The Indonesian economy probably grew by 4.7% in the last quarter of 2021 and 3.5% for the year as a whole. Annual growth for this year and next was estimated at 5.1%.

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Reporting by Shaloo Shrivastava; Poll by Prerana Bhat, Devayani Sathyan and Md Manzer Hussain; Editing by Ross Finley/Mark Heinrich

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