Money in Indonesia

Indonesia - Money

Central Bank holds rates in January but starts gradual normalization

At its monetary policy meeting on 19–20 January, in a move widely expected by market analysts, Bank Indonesia (BI) decided to leave the seven-day reverse repo rate at the all-time low of 3.50%, where it has been since February 2021. However, the Bank also announced an increase in the reserve requirement from 3.5% to 5.0% from 1 March, in a first step towards monetary policy normalization.

The Bank’s decision to retain its pro-growth stance was due to its commitment to support the ongoing recovery and the local currency, amid solid foreign demand and consumer spending but also amid a pickup in Covid-19 cases due to the spread of the Omicron variant. BI maintained its GDP growth projection at 4.7%–5.5% for this year and expects headline inflation to move within the 2.0%–4.0% target range in 2022.

Looking ahead, in its communiqué BI stated that monetary policy this year “will be more directed at maintaining stability as well as mitigating the impact of the global series of policy normalization in developed countries”, therefore hinting at further normalization ahead amid the global tightening cycle. The majority of our panelists expect the Bank to hike rates slightly in 2022.

Commenting on the release, Nicholas Mapa, senior economist at ING, stated:

“With Fed rate hikes looming and with inflation likely to pick up this year, we could see BI resorting to actual rate hikes by Q2 2022 should the Indonesian rupiah (IDR) come under pressure. The IDR has remained relatively stable and will not likely react much to the announcement on RR in the near term, but the currency may come under pressure as we approach the projected Fed rate hike.”

The seven-day reserve repo rate is forecast to end 2022 at 3.92% and 2023 at 4.52%.