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Indonesia Monetary Policy May 2024

Indonesia: Central Bank stands pat in May

As widely expected, at its meeting on 21–22 May, the Bank Indonesia (BI) held the BI-Rate at 6.25%, on the heels of April’s unexpected 25 basis point hike. The Bank also held the deposit facility and lending facility rates at 5.50% and 7.00%, respectively.

The Bank justified its decision by highlighting the need to stabilize the rupiah and maintain inflation within the 1.5–3.5% target corridor for 2024 and 2025. The decision is part of BI’s ongoing strategy to preemptively curb price pressures and support growth through a mix of monetary, macroprudential and payment-system policies. The Bank noted that domestic growth was resilient in Q1, inflation remained within target in April, and the rupiah recently strengthened against the greenback, pointing to the efficacy of current monetary policy settings. Nevertheless, the risk that U.S. interest rates will remain higher for longer amid elevated U.S. inflation kept BI on guard.

The Bank’s press release did not contain explicit forward guidance. Going forward, unexpected weakness in the rupiah—potentially triggered by a devaluation of the Chinese yuan in response to new U.S. tariffs on Chinese exports—could further delay BI’s rate cuts or even prompt additional hikes. Moreover, the palm oil sector—one of the largest sources of USD inflows—will be a factor to monitor, as lower prices could dent USD supply and weaken the rupiah.

Our panelists now see the BI-Rate ending the year near end-2023’s level, about 25 basis points lower than current levels. That said, a growing number of analysts expect BI to either hold rates stable through December or to deliver additional rate increases.

The next monetary policy meeting is scheduled for 19–20 June.

DBS analysts expect the BI-Rate to remain at current levels by year-end:

“While the bar to return to rate hikes is high, policymakers will prefer to retain rate differentials to keep rupiah assets stable, lowering the likelihood of imminent rate cuts. Our base case is for the BI to extend its pause for [the] rest of the year.”

Nomura’s Euben Paracuelles and Nabila Amani, conversely, expect BI to hike further this year:

“BI’s hawkish tone and its caution on external risks support our forecast it will hike by 25bp in June, premised on our view of a marked widening in Q2 [of the current account deficit], which could keep BOP pressures on IDR. […] Still, we acknowledge our BI forecast for June is highly dependent on IDR developments and that the key risk to our view is the external backdrop remaining stable in the near-term, geopolitical tensions staying in check and/or the Fed turning dovish.”

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