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Indonesia Monetary Policy November 2023

Indonesia: Bank Indonesia holds fire in November

Bank Indonesia (BI) held the 7-day reverse repo rate at 6.00% at its 22–23 November meeting, following a 25 basis point hike in October. The Bank also left the deposit facility and lending facility rates unchanged at 5.25% and 6.75%, respectively. November’s hold was largely in line with market expectations.

BI aimed, once more, to bolster the rupiah amid increasing global uncertainty. Described as a “pre-emptive and forward-looking measure”, the Bank’s decision doubled down on supporting the currency and restraining potential imported price pressures; the hold is set to ensure inflation remains within the target ranges of 2.0–4.0% and 1.5–3.5% for 2023 and 2024, respectively. A largely stable rupiah against the USD so far this year due to past policy decisions, expectations that the Federal Reserve’s tightening cycle has come to a close and early signals that economic growth is feeling the delayed strain of high interest rates have prompted the Bank to avoid further hikes. Meanwhile, the Bank maintained its accommodative macroprudential stance to boost credit and economic growth.

The communiqué was absent of explicit forward guidance. That said, given inflation remains within the target range, exchange rate stability is set to be the priority for future monetary policy decisions. The performance of the U.S. dollar, unexpected U.S. Fed hikes and geopolitical tensions dampening investor sentiment are depreciatory risks. A weaker-than-expected rupiah could prompt the Bank to resume interest rate hikes. Most of our panel forecasts rates to remain unchanged through end-2023 and decrease in 2024, while some panelists have penciled in an additional hike at this year’s final meeting, scheduled for 20–21 December.

Euben Paracuelles and Nabila Amani, analysts at Nomura, commented on the outlook:

“We still see BI as unlikely to start its cutting cycle before the Fed, aiming to keep interest rate differentials stable and support BI’s FX stability objective. We therefore continue to expect the policy rate to be lowered by BI only from September 2024, in tandem with our US team’s forecast of the start of the Fed’s cutting cycle.”

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