Indonesia: Central Bank continues tightening cycle in October
At its monetary policy meeting on 19–20 October, Bank Indonesia (BI) raised the seven-day reverse repo rate by 50 basis points from 4.25% to 4.75%, 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 4.00% and 5.50%, respectively.
The Bank’s decision was underpinned by the need to anchor inflation expectations and return core inflation closer to the middle of its 2.0–4.0% target range by H1 2023. On top of this, the decision was taken to support the rupiah in the face of a strengthening U.S. dollar and considerable global financial uncertainty, and also factored in robust domestic demand dynamics.
Looking ahead, the Bank sees downside risks to growth stemming from economic slowdowns in the U.S. and China and tighter monetary policy in developed countries, while it expects inflation to remain elevated amid prolonged geopolitical tensions and supply-chain disruptions. As such, the majority of our panelists expect the Bank to hike rates further before end-2022 and through 2023.
Commenting on the outlook, Nicholas Mapa, senior economist at ING, remarked:
“BI was a relative latecomer to the central bank rate hike club and we believe that Governor Perry Warjiyo’s work is far from over. Inflation will likely pick up further in the coming months which should ensure BI stays hawkish to close out the year. Additional BI rate hikes will also be needed to maintain FX stability, especially with markets pricing in aggressive rate hikes by the US Federal Reserve.”
The Bank is expected to meet on 16–17 November.