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Indonesia Monetary Policy October 2021

Indonesia: Central Bank holds fire in October

At its monetary policy meeting held on 18–19 October, Bank Indonesia (BI) decided to leave the seven-day reverse repo rate at the all-time low of 3.50%, where it has been since February. The move was widely expected by market analysts.

The Bank’s decision to stand pat was led by its commitment to support the ongoing recovery, as well as the local currency, amid a moderate inflation environment and well-anchored inflation expectations. Inflation stood at 1.6% in September, while activity is expected to have expanded in Q3 alongside greater public mobility. BI expects GDP growth at 3.5%–4.3% this year, while headline inflation is seen staying below the midpoint of the 2.0%–4.0% target range until end-2021 and remaining within that band in 2022.

Looking ahead, BI maintained its dovish tone in its communiqué, pledging to stick to a supportive monetary stance and reiterating its commitment to “maintaining macroeconomic and financial system stability, while supporting national economic recovery efforts”. All of our panelists expect the Bank to keep the rate at 3.50% at its next two meetings in November and December.

Commenting on the monetary policy outlook for next year, Jonathan Sequeira, economist at Goldman Sachs, said:

“Going forward, we expect BI to begin normalizing monetary policy settings in Q2 2022, starting with tighter liquidity conditions to push effective rates back up towards the policy rate, from 50–75bp below the policy rate currently. Then as liquidity conditions return to neutral, we expect BI to start hiking policy rates—with one 25bp hike each in Q3 and Q4 2022.”

The next meeting is scheduled for 17–18 November.

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