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Indonesia Monetary Policy October 2023

Indonesia: Bank Indonesia delivers surprise hike in October

Bank Indonesia (BI) raised the 7-day reverse repo rate by 25 basis points to 6.00% at its 18–19 October meeting after eight consecutive holds. The Bank also increased the deposit facility and lending facility rates to 5.25% and 6.75%, respectively. October’s hike surprised markets, which had expected the BI to extend its pause.

With price pressures largely under control as a result of previous policy tightening, the Bank’s decision aimed to bolster the rupiah. The BI described its decision as a “pre-emptive and forward-looking measure” to support the currency and restrain potential imported price pressures. Higher-for-longer U.S. rates and growing global uncertainty due to surging conflict in the Middle East have put pressure on the rupiah recently. As such, October’s decision highlighted the Bank’s increased sensitivity to U.S. monetary policy in contrast to the start of the year. Additionally, the BI stressed the need for additional measures to combat currency pressures, namely increased FX intervention and the issuance of new government securities from 17 November to attract financial inflows. Meanwhile, the Bank loosened macroprudential measures further to boost credit and economic growth.

The Bank did not provide explicit forward guidance in its communiqué. That said, FX stabilization is set to remain the priority for monetary policy decisions going forward. Consequently, the performance of the U.S. dollar, the policy course of the U.S. Fed and geopolitical tensions dampening investor sentiment will be the key factors to watch. A weaker-than-expected rupiah could prompt additional interest rate hikes, as well as the introduction of new policy tightening instruments.

In light of October’s surprise decision, our panelists are reviewing their forecasts for the policy rate.

The next monetary policy meeting is scheduled for 22–23 November.

Krystal Tan and Jennifer Kusuma, analysts at ANZ, commented on the outlook: “The adverse external environment with higher US yields and elevated geopolitical tensions makes it difficult to rule out further rate hikes from BI. Meanwhile, we are not convinced that today’s measures will meaningfully alter the economic outlook. Instead, the macroprudential and liquidity easing measures risk undermining the signalling effect from the rate hike.”

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