Indonesia Monetary Policy November 2022

Indonesia

Indonesia: Central Bank continues tightening cycle in November

November 17, 2022

At its monetary policy meeting on 16–17 November, Bank Indonesia (BI) raised the seven-day reverse repo rate by 50 basis points from 4.75% to 5.25%, marking a continuation of its tightening cycle. The size of the hike was expected by market analysts. The Bank also hiked the deposit facility rate and lending facility rate by 50 basis points each to 4.50% and 6.00%, respectively.

The Bank decided to continue tightening aggressively in a move which was dubbed “front-loaded” by the Governor and is aimed at anchoring inflation expectations and returning core inflation closer to the middle of its 2.0–4.0% target range by H1 2023. Inflation expectations have moderated but remain elevated at around 5.9% for year-end, down from previous expectations of 6.7%. Meanwhile, the Bank aims to continue to support the rupiah against the backdrop of considerable global financial uncertainty. BI also factored in in robust domestic demand dynamics as providing room for the hike. The Bank expects growth to come at the upper end of the 4.5–5.3% range this year and to remain robust into 2023.

Looking ahead, the Bank sees downside risks to growth stemming from a deeper global economic slowdown and tighter monetary policy in developed countries, while it expects inflation to remain elevated amid protracted geopolitical tensions and supply-chain disruptions. As such, our panel expects the Bank to hike rates further ahead, although the heavy lifting should be behind it.

Commenting on the outlook, Enrico Tanuwidjaja, economist at UOB, remarked:

“Going forward, we revised and brought forward our BI rate forecast to 5.50% (previously 5.25%) by the end of 2022 and revised higher the terminal rate to 6.00% (previously 5.75%) that is likely to occur on 23 February. This will give a reasonably comfortable yet historically tighter spread of circa 100bps with the expected terminal rate of the Fed funds rate of 5.00% by Q1 2023.”

The Bank is expected to meet on 21–22 December.

The seven-day reserve repo rate is forecast to end 2023 at 5.57% and 2024 at 5.08%.


Author: Massimo Bassetti, Senior Economist

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Indonesia Monetary Policy November 2022

Note: BI seven-day reverse repo rate in %.
Source: Bank Indonesia (BI).


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