Indonesia: Central Bank holds steady at June meeting
At its monetary policy meeting on 22–23 June, Bank Indonesia (BI) voted once again 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.
Despite inflation surging to a five-year high in June amid elevated prices for food, core inflation came in comfortably below expectations. Domestically, growth has remained robust on the back of both rising demand at home and a healthy trade surplus through May due to the ongoing commodities boom. Thus, BI stated it would prioritize economic growth amid concerns that rising price pressures could lead to stagflation.
In its June release, the Bank’s tone turned more dovish and it removed its previous statement where it hinted at a possible start to a monetary tightening cycle. Moreover, during a parliamentary hearing, governor Perry Warjiyo said that “core inflation is relatively low, so that it provides room for flexibility for us to not be in a rush to raise interest rates”. That said, the Bank stated in its release that it will, “remain vigilant of inflationary pressures moving forward and their impact on inflation expectations, and is prepared to adjust interest rates if signs of higher core inflation are detected.” The majority of our panelists expect the Bank to hike rates slightly in 2022.
Regarding the outlook, economists at Goldman Sachs see the Bank tightening rates by Q3:
“Going forward, we continue to forecast a cumulative 100bp of policy rate hikes this year starting in Q3 2022. However, given the more hawkish Fed and potential larger inflationary pressures as global food and energy prices continue to rise, we see risks of faster monetary policy tightening from the BI in H2 this year.”
Nicholas Mapa, senior economist at ING, sees the Bank’s upcoming decisions being driven by core inflation:
“Core inflation is currently at 2.6%, comfortably within BI’s inflation target for the year. […] Given the current inflation readings, BI can afford to extend policy support to the economy for a bit longer but we expect Warjiyo to change his tune should core inflation edge higher to the 4% top-end of the inflation target.”