Central Bank holds interest rates again in June

At its meeting on 19–20 June, the Central Bank decided to keep the BI-Rate steady at 6.25% for the second consecutive meeting, in line with market expectations. The Bank also maintained the Deposit Facility (DF) rate at 5.50% and the Lending Facility (LF) rate at 7.00%.

The key domestic factors influencing the Central Bank's decision on interest rates included the aim to keep inflation within its 1.5–3.5% target corridor during 2024 and 2025; price pressures receded to 2.8% in May from 3.0% in April. The Bank sees inflation remaining within target in 2024 due to anchored inflation expectations, spare capacity in the domestic economy and a low level of imported inflation. Meanwhile, the authorities stated they would continue to intervene in foreign exchange markets to shore up the rupiah, which has recently faced sizeable depreciatory pressures due to a strong USD, geopolitical uncertainty and concerns over fiscal largesse. Governor Warjiyo largely ruled out strengthening the currency through an additional rate hike, as inflation remained low and economic growth could take a hit from further tightening.

The Bank did not provide explicit forward guidance on the trajectory of the BI-Rate later this year. The majority of our panelists anticipate that the monetary policy loosening cycle will commence in Q4 this year, following the U.S. Fed’s expected pivot. That said, several analysts see rates remaining at current levels through year-end, and a minority foresee one more rate hike in the coming months. Unexpected inflation spikes and rupiah weakness pose upside risks to the policy rate, while an earlier-than-anticipated rate cut by the Fed is a downside risk. The Central Bank will convene again on 16–17 July.

HSBC’s Pranjul Bhandari anticipates gradual rate cuts starting later this year: “We believe BI will be patient. It will not front-run the Fed on rate cuts and may even prefer a later and shallower rate cutting cycle. For now, our base case is for BI to cut rates starting 4Q24, taking the benchmark policy rate to 5.25% by mid-2025.” In contrast, Nomura analysts expect Bank Indonesia (BI) to remain on hold this year: “For now, we expect BI to stay on hold this year, amid still-high external uncertainty and rising fiscal risks; we expect BI’s cutting cycle to start only in Q1 2025, for a total of 100bp of cuts, taking the policy rate to 5.25%.” United Overseas Bank analysts Enrico Tanuwidjaja and Agus Santoso echoed this view: “We believe that with easing inflationary pressures globally as well as in Indonesia, along with likely softening of the economic growth momentum as tight monetary policy worked its way through, there is room for BI to start easing early 2025. We are of the view that USD is likely to weaken along with the US Fed rate cut in the final quarter of the year, which will add more support for interest rates level in Indonesia to be lowered as broad dollar weakness will bring about an appreciation of the IDR, making it timely to deliver Indonesia’s first rate cut in 1Q25.”

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