Economist Enrico Tanuwidjaja at UOB Group assesses the latest decision by the Bank Indonesia (BI).
Key Takeaways
“Bank Indonesia (BI) kept its benchmark policy rate (7-Day Reverse Repo) unchanged at 5.75% in Feb MPC meeting, in line with consensus expectation.”
“BI remains of the view that inflation expectations is anchored while continues to view that rupiah stability is here to stay. Specifically, BI is of the view that headline and core inflation have trended back to BI’s target range of 2-4% faster than expected.”
“Today’s MPC decision marks the end of the current hiking cycle, which was started in Aug 2022. Therefore, we revised our BI rate forecast to remain unchanged at 5.75% for the rest of this year and for BI to potentially embark on an asymmetric rate cut cycle in 1H24. At the current level, BI rate still gives a positive but at much tighter spread historically with our expected terminal rate of the Fed funds rate of 5.25% by 2Q23.”
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The Bank of Indonesia (BI) is looking to end its tightening cycle over, according to recent comments from the Central Bank. This prospect comes as it has recently scaled back its benchmark interest rate to 5.75%.
The central bank has implemented five monetary policy rate hikes over the course of the current cycle, which began in May 2018. This tightening saw the rate rise from a record low of 4.25% to its current slim level of 5.75%.
One of the main reasons behind BI’s decision to ease their stance was due to the weakening of inflationary pressures. Consumer prices rose by 3.18% year-on-year in March, marking the lowest reading since the current tightening cycle began.
Furthermore, trends in the external sector and investor risk appetite have also contributed to the central bank’s recent decision to decrease its policy rate.
Commenting on the matter, Anugerah Hanindyo Putra, an economist at UOB Group, suggests that the current rate could mark the end of BI’s current cycle.
He notes, “We think that this could be the last reduction for the near term, at least for the first half of this year.”
The economist also states that the central bank could raise rates should external headwinds strengthen, which would create emerging market volatility. However, he views such a move as unlikely in the near term, as Indonesia is still looking to capitalize from stronger global growth prospects.
Ultimately, much could depend on how flexible the central bank is willing to be when it comes to managing economic conditions. Any indication of a perceived lack of action could cause further volatility in financial markets. On the other hand, if BI does indeed hold this current rate, it could be the sign that stability is on the horizon.
With Indonesia having recently ended its tightening cycle, the outlook appears to be improving within the archipelago. For now, all eyes are on the Bank of Indonesia, which could either open the way to further stability or increasing volatility.
