Indonesia: Central Bank continues tightening cycle in September
At its monetary policy meeting on 21–22 September, Bank Indonesia (BI) raised the seven-day reverse repo rate by 50 basis points to 4.25%, marking a continuation of its tightening cycle. The size of the hike took market analysts by surprise; most expected a 25 basis point rise. The Bank also hiked the Deposit Facility rate and Lending Facility rate by 50 basis points each to 3.50% and 5.00%, respectively.
When explaining its decision, BI highlighted the need to reduce inflation expectations and return core inflation—which rose to 3.2% in September, its highest level in two years—closer to the middle of its target range of 2.0–4.0% by late 2023. Echoing its August release, BI sees non-subsidized fuel and food prices pushing inflation up higher in the short term. Domestically, robust private spending is sustaining economic growth, amid upbeat retail sales and consumer confidence, and government subsidies to protect consumers from rising prices. This, coupled with strong external demand for Indonesia’s key exports—palm oil, coal, iron and steel—gave the bank further room to continue raising rates.
Looking ahead, the Bank continues to expect price pressures to intensify after the government eased subsidies on fuel prices. Meanwhile, BI expressed concerns that a looming recession in several countries and ongoing supply disruptions could push prices even higher. 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:
“A much more pronounced pickup in price pressures could prompt a more forceful response from BI. On top of supply-side pressures, domestic economic activity has been robust which could lead to additional price pressures coming from the demand side. BI could also double down on rate hikes should the Indonesian rupiah come under intense pressure in the coming months.”
The Bank is expected to meet on 19–20 October.