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Indonesia Monetary Policy April 2022

Indonesia: Central Bank holds rates in April

At its monetary policy meeting on 18–19 April, Bank Indonesia (BI) opted to leave the seven-day reverse repo rate at the all-time low of 3.50%—where it has been since February 2021—in a move widely expected by market analysts.

The decision came as BI continued to prioritize economic growth and exchange rate stability over price stability, with price pressures rising due to external causes, mainly the Russia-Ukraine war. After starting Q1 on a solid footing, the economy took a hit from a record-breaking Covid-19 wave in February and high-frequency indicators point to a slowdown in the quarter. Meanwhile, inflation rose to a two-year high of 2.6% in March, but is still expected to remain within the Bank’s 2.0–4.0% target range ahead, cementing the Bank’s decision to take a wait-and-see-approach.

In its communiqué, BI reiterated that it will continue to support the economy, moving away from is earlier stance which hinted at a possible monetary tightening cycle. The Bank explicitly stated that it “remains committed to strengthening policy synergy with the Government and Financial System Stability Committee to control inflation, maintain monetary and financial system stability as well as revive lending to the corporate sector and other priority sectors to foster economic growth.” The majority of our panelists expect the Bank to hike rates slightly in 2022.

Regarding the outlook, economists at Goldman Sachs foresaw the Bank tightening rates by Q3:

“For now, the stable IDR and still well-behaved-inflation gives BI some latitude in deciding the pace of domestic policy normalization. However, as the Fed accelerates its hiking pace and inflationary pressures build over the course of the year, we expect BI to tighten policy further. We continue to forecast a cumulative 75 basis points of policy rate hikes this year starting in Q3 2022.”

Nicholas Mapa, senior economist at ING, envisioned a slightly quicker start of the tightening cycle:

“With core inflation heating up last March (2.4% from 2.0% previously) and with signs pointing to a sustained acceleration of this indicator, BI may still need to consider a shift in tone at the May or June meetings. We expect core inflation to crest 3% in the coming months, a development that could still push BI to tighten policy rates amid the backdrop of slowing growth should inflation threaten the upper end of BI’s inflation target.”

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