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MNI BI Preview – May 2022: Governors To Stand Pat, But Tightening Risk Grows

EXECUTIVE SUMMARY

  • Consensus looks for a stand-pat decision from Bank Indonesia this week, with a minority of analysts calling for a 25bp hike to the benchmark 7-Day Reverse Repo Rate. We agree with consensus forecast when it comes to the base-case scenario but admit that a pre-emptive rate hike cannot be ruled out.
  • The rupiah has depreciated sharply since the last meeting of Bank Indonesia, which will draw policymakers' attention. Increasingly hawkish posturing by the Fed and a suite of other central banks has played a role in undermining the rupiah.
  • Core inflation targeted by Bank Indonesia remains within the target range, but is clearly on the uptrend. Likewise, headline inflation reached the fastest pace since 2017 in April, with potential for further acceleration this month.
  • However, Bank Indonesia officials insisted that they were first planning to withdraw liquidity through RRR hikes, with interest-rate hikes serving as the measure of last resort. An early rate hike would complicate their messaging.

Click to view the full preview: MNI BI Preview May 2022.pdf

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