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Indonesia Monetary Policy December 2023

Indonesia: Bank Indonesia maintains rates in December

Bank Indonesia (BI) held the BI-Rate—previously called the 7-day reverse repo rate—at 6.00% at its 20–21 December meeting, following November’s hold. The Bank also left the deposit facility and lending facility rates unchanged at 5.25% and 6.75%, respectively. December’s decision matched market expectations.

BI justified the hold as necessary to continue supporting the rupiah and ensure inflation remains within the 1.5–3.5% target in 2024. The Bank also doubled down on its unorthodox mix of policy measures, including interventions in currency markets to shore up the currency and accelerating the digitalization of payment systems. Simultaneously, the Bank maintained its macroprudential policies to boost domestic activity and offset potential downward pressures on the economy from the still-tight monetary framework, including through measures encouraging lending to households and the private sector.

December’s communiqué was once again void of explicit forward guidance. Nevertheless, the Bank remained cautious of elevated geopolitical uncertainty threatening currency and price stability. Going forward, the strength of the rupiah, the impact of the El Niño weather event on food inflation and the pace of monetary policy easing by the U.S. Fed will all influence the Bank’s decisions in 2024. The Consensus is for BI to lower rates next year, with the majority of our panelists anticipating the first cuts in Q3 2024. The next meeting is scheduled for 16–17 January.

Analysts at Nomura see the monetary policy easing cycle kicking off as early as June:

“[We] believe BI will be unable to start its easing cycle before the Fed. The external backdrop and the Fed’s higher-for-longer narrative will be key considerations for BI, given FX stability remains its top priority. [The] elections may also weigh on sentiment and capital flows, which should keep BI cautious about cutting rates too early, even if headline CPI inflation remains within its target range. […] Overall, we forecast a total of four 25bp cuts by BI from June to October, taking the policy rate back to the pre-pandemic level of 5%.”

In contrast, UOB analysts Enrico Tanuwidjaja and Agus Santoso expect the BI to extend its pause through end-2024:

“Uncertainty and volatility surrounding the path of inflation and exchange rate movement are key reasons for our forecast for the BI rate to remain unchanged next year. We also view that the upside risks from food inflation could still be a reason for inflation to moderate slower. Should this risk not materialize, we should revise our forecast and would review our call for the start of rate cutting cycle.”

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