FILE PHOTO: The logo of Indonesia’s central bank, Bank Indonesia, is seen on a window in the bank’s lobby in Jakarta, Indonesia September 22, 2016. REUTERS/Iqro Rinaldi
February 8, 2022
By Shaloo Shrivastava
BENGALURU (Reuters) – Indonesia’s central bank will raise rates faster than thought just a month ago as concerns mount about a weaker rupiah as the Federal Reserve gears up to increase its own interest rate next month amid soaring U.S. inflation, a Reuters poll showed.
But unlike many major economies, Indonesian inflation has largely remained benign, only inching up to 2.18% in January after spending most of the previous two years below Bank Indonesia’s (BI) target range of 2%-4%.
All 26 economists polled Feb. 2-7 expected BI to hold its benchmark seven-day reverse repurchase rate at a record low of 3.50% at the conclusion of its policy meeting on Thursday.
Over one third of respondents, 8 of 20, expected a hike as soon as next quarter but medians in the latest poll predicted 50 basis points of tightening in July-September, compared to 25 basis point increases in the third and fourth quarter in a January poll.
“If inflation is picking up and the external pressure is stronger from previous expectations, they (BI) need to adjust their rates as well by 50 basis points in the third quarter,” said Irman Faiz, an economist at Bank Danamon.
Although the median forecast was for no move in the final quarter, economists’ predictions were on a knife edge.
Eight of 17 respondents saw BI’s key interest rate at 4.25% or higher – two said 4.50%. Another six said 4.00%, two said 3.75% and one respondent said BI would keep it on hold all year at the current 3.50%.
But much will depend on how the Indonesian rupiah performs. The currency has been fairly stable this year, falling just 1% against a strengthening dollar. A Reuters poll taken six weeks ago showed the rupiah trading around current levels in 12-months.
Economists at ING noted the “trigger points” for BI shifting from an accommodative stance to one where it is focused on price pressure “would be accelerating inflation coupled with depreciation pressure on the Indonesian rupiah linked to Fed tightening”.
Emerging market central bankers are keeping an eye on the Fed in case its tightening cycle leads to capital outflows.
Southeast Asia’s largest economy expanded 5% in the final quarter of 2021, slightly stronger than a Reuters poll median. But a recent spike in COVID-19 infections may prompt policymakers to stay cautious for now.
(Reporting by Shaloo Shrivastava; Polling by Vivek Mishra and Devayani Sathyan; Editing by Alison Williams)
Source: One America News Network
