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Indonesia Monetary Policy March 2022

Indonesia: Central Bank holds rates in March

At its monetary policy meeting on 16–17 March, 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—in a move was widely expected by market analysts.

The Bank’s decision came in a bid to support economic growth and exchange rate stability amid rising price pressures as a result of the Russia-Ukraine war. High frequency indicators for Q1 hint at upbeat activity on the back of robust domestic dynamics. Meanwhile, inflation has remained relatively subdued (February: 2.1%; January: 2.2%) and is still expected to remain within the Bank’s 2.0–4.0% target range, giving BI further room to take a wait-and-see-approach.

In its communiqué, BI stated that it “remains committed to strengthening policy synergy with the Government and Financial Stability Policy 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, stimulate exports and increase economic and financial inclusion”. As such, the Bank moved away from its previous statements where it hinted at gradual normalization, and is now prioritizing economic growth instead. The majority of our panelists expect the Bank to hike rates slightly in 2022.

Regarding the outlook, economists at Goldman Sachs now see 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, also sees a delayed start of the tightening cycle:

“BI Governor Perry Warjiyo had singled out currency stability and worrisome inflation as potential triggers for a reversal, but neither appear to be of concern just yet. Domestic inflation has remained subdued in large part due to fuel subsidies that keep transport costs controlled, although we are unsure if fiscal authorities will be expanding such measures as they chase fiscal consolidation targets. Nevertheless, it appears that BI does have room to retain its accommodative stance for just a little longer as inflation has yet to threaten the upper end of its 2.0–4.0% target.”

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