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Indonesia Monetary Policy April 2024

Indonesia: Central Bank decides to raise interest rates in April

At its meeting on 23–24 April, the Indonesian Central Bank (BI) unexpectedly decided to raise the BI-Rate by 25 basis points to 6.25%—a fresh record high. The Bank also raised the deposit facility and lending facility rates by 25 basis points to 5.50% and 7.00%, respectively.

The Bank’s decision was primarily driven by the need to stabilize the rupiah amid a deteriorating global risk environment, which strengthened the U.S. dollar and exerted depreciatory pressure on the domestic currency. In addition, Bank Indonesia’s hike sought to maintain inflation within the 1.5%–3.5% target corridor for 2024 and 2025. This move was part of a broader strategy to preemptively address inflationary pressures while supporting sustainable economic growth through a mix of monetary, macroprudential and payment system policies.

The Bank’s press release did not contain explicit forward guidance. However, in a subsequent statement, Governor Warjiyo stated that the rupiah is seen appreciating from current levels by end-2024 and scrapped any mention of rate cuts this year, marking a shift in tone and reinforcing the Bank’s hawkish stance. Additionally, Bank Indonesia revised its forecast for the U.S. Fed’s pivot from a 75 basis point cut in H2 2024 to a 25 basis point cut in December or early 2025. This change suggests that Bank Indonesia’s monetary policy loosening cycle will also commence later than previously anticipated. Given the Bank’s unexpected decision, our panelists are in the process of revising their BI-Rate forecasts.

The next monetary policy meeting is scheduled for 21–22 May.

United Overseas Bank analysts Enrico Tanuwidjaja and Agus Santoso commented on the outlook:

“We think today’s 25bps rate hike is likely to be a one-off and therefore we have revised our forecast for 2024’s BI rate now to remain unchanged but only at a higher level of 6.25% in light of today’s hike. We keep our forecast for BI to start cutting its benchmark rate in 1Q25 to 5.75%.”

Analysts at Nomura said:

“Taking into account BI’s strong focus on promoting FX stability and limited concerns on the growth outlook, we revise our policy rate forecast and now expect a follow-up 25bp hike to 6.50% in June. In addition to the Fed likely staying hawkish in the near-term, we still expect Indonesia’s current account deficit to widen significantly in Q2 due to large dividend repatriation. The political transition, as we have been arguing, is also causing FDI inflows to weaken, adding to overall balance of payments pressures. […] Consequently, we no longer see policy rate cuts by BI this year […]. Considering today’s BI rhetoric, we think BI may be more willing to delay the start of its cutting cycle to much later than the Fed’s, especially if geopolitical tensions persist.”

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