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Indonesia Monetary Policy January 2023

Indonesia: Central Bank hikes rates further in January; signals end of tightening cycle

At its monetary policy meeting on 18–19 January, Bank Indonesia (BI) raised the seven-day reverse repo rate by 25 basis points from 5.50% to 5.75%, marking a continuation of its tightening cycle and bringing the total increase in rates to 225 basis point since August. The size of the hike was expected by market analysts. The Bank also hiked the deposit facility rate and lending facility rate by 25 basis points each to 5.00% and 6.50%, respectively.

The Bank decided to continue tightening “in a front-loaded, pre-emptive, and forward-looking measure” to anchor inflation expectations and bring inflation within its 2.0–4.0% target range. Meanwhile, the Bank aimed to support the rupiah to control imported inflation. BI commented that inflation expectations have moderated, and it expects headline inflation to move within the Banks target range in the second half of this year. As for economic activity, the Bank expects growth to come in at the midpoint of the 4.5–5.3% range this year, supported by robust domestic demand.

Looking ahead, Governor Perry Warjiyo suggested that an end to the monetary tightening cycle—barring unexpected data—was ahead, calling existing hikes “adequate” for taming inflation in a statement.

Commenting on the outlook, Nicholas Mapa, senior economist at ING, remarked:

“Despite todays rate hike, we acknowledge the apparent shift in tone from Warjiyo. BI has opted to extend its tightening cycle given that inflation will likely be above target for the first half of 2023. However, BIs downward revision to the global growth outlook suggests that it is now increasingly wary of the negative impact this could bring to Indonesias own growth trajectory. The stark shift in tone suggests that BI is likely approaching the end of this rate hike cycle and that a pause will be considered in the coming months.”

The Bank is expected to meet on 15–16 February.

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