Indonesia: Central Bank slows the pace of tightening in December
At its monetary policy meeting on 21–22 December, Bank Indonesia (BI) raised the seven-day reverse repo rate by 25 basis points from 5.25% to 5.50%, a softer increase than the 50 basis-point hike delivered in November. The size of the hike was expected by market analysts. The Bank also hiked the deposit facility rate and lending facility rate by 25 basis points each to 4.75% and 6.25%, respectively.
The Bank decided to continue tightening, albeit less aggressively, “in a front-loaded, pre-emptive, and forward-looking measure” to anchor inflation expectations and keep core inflation within its 2.0–4.0% target range. BI commented that inflation expectations have moderated but remain elevated. Meanwhile, the Bank aims to continue to support the rupiah against the backdrop of considerable global financial uncertainty. BI also factored in robust domestic demand dynamics as providing room for the hike. The Bank expects growth to come in above the 4.5–5.3% range this year and to move within that range in 2023.
Looking ahead, the Bank did not give explicit guidance on the future direction of interest rates, simply stating that policy will remain “pro-stability”. Our panel expects the Bank to tighten its stance further ahead, although future rate hikes are likely to be more modest than those seen earlier this year.
Commenting on the outlook, Nicholas Mapa, senior economist at ING, remarked:
“Despite the pullback in the pace of tightening, we believe BI will continue with the current tightening cycle next year. BI believes that the Fed will continue to hike rates in the first half of 2023 and we could see BI following suit with rate hikes of their own. The IDR has come under some pressure to close out 2022 and we believe BI will need to match Fed rate hikes to help maintain FX stability.”