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Indonesia Monetary Policy February 2022

Indonesia: Central Bank holds rates in February but hints at gradual normalization

At its monetary policy meeting on 9–10 February, 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 2021. The move was widely expected by market analysts. Meanwhile, the Bank also reiterated that it would increase the reserve requirement from 3.5% to 5.0% from 1 March, in a first step towards monetary policy normalization.

The Bank’s decision to hold rates steady came on the back of healthy economic momentum and moderate price pressures. On the one hand, GDP growth accelerated in the fourth quarter amid a broad-based improvement (Q4: +5.0% yoy; Q3: +3.5% yoy), while high frequency indicators for the current quarter hint at upbeat activity. On the other hand, although inflation hit an over one-year high in January, it nevertheless remained within the Bank’s 2.0%–4.0% target range, giving the BI further ground to continue with its wait-and-see approach.

In its communiqué, the BI noted increasing price pressures and stated that “Bank Indonesia remains firmly committed to maintaining price stability and strengthening policy coordination with the central and regional governments through national and regional inflation control teams (TPIP and TPID) to control headline inflation within the target”—again hinting at further normalization ahead. The majority of our panelists expect the Bank to hike rates slightly in 2022.

Regarding the outlook, Jonathan Sequeira and Danny Suwanapruti, economists at Goldman Sachs, see the Bank tightening rates as soon as Q2:

“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 more liquidity tightening that would push effective rates back up towards the policy rate in Q2 2022, with 75 basis points of policy rate hikes in H2 2022”.

Nicholas Mapa, senior economist at ING, echoed this stance:

“We believe BI could be closing in on a potential reversal of its stance in the near term. The trigger points for any such reversal would be the gradual acceleration of inflation and heightened depreciation of IDR with the first rate hike by BI possibly happening by Q2.”

Regarding the outlook, Jonathan Sequeira and Danny Suwanapruti, economists at Goldman Sachs, see the Bank tightening rates as soon as Q2:

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