MNI INSIGHT: Indonesia CenBank Sees A Window To Drive Recovery

Indonesia’s central bank believes that benign domestic inflation has extended the opportunity to keep policy settings accommodative as it continues to prioritise economic recovery from the pandemic, MNI understands.

Bank Indonesia on Thursday left the benchmark seven-day repurchase rate unchanged at 3.5%, where it has been since September 2020, citing the need for stability and the strengthening of the recovery, (See: MNI BRIEF: Tame Inflation Sees BI Keep Rates on Hold).

While BI understands that inflation is gaining in momentum the view is that – with CPI at 3.55% in May against the target of 2% to 4% - there is still time for the current settings to stimulate the recovery before tightening becomes necessary.

INFLATION STILL A CONCERN

BI Governor Perry Warjiyo has acknowledged that inflation is likely to break through the top end of the target towards the end of this year, but in the meantime the bank does not feel the need to be pro-active.

Updated inflation data will be released next week.

BI is forecasting 4.5% to 5.3% domestic GDP growth this year, a slight downgrade on earlier forecasts, while the bank has downgraded its estimate of global growth from 3.4% to 3%.

OTHER EMERGING MARKETS

The declining rupiah, which has lost around 4.5% so far this year, is a concern to the central bank although it has pointed out that the depreciation is less than that of the currencies of India, Thailand and Malaysia, (See: MNI STATE OF PLAY: Malaysia Moves Early With Rate Hike and MNI INSIGHT: Rates Outlook Turning Hawkish in Thailand).

MNI understands that while the momentum for inflation and the depreciation of the rupiah is likely to create pressure for tighter policy, BI sees an extended window to maintain current policies before that pressure demands a fuller response.

The bank has pointed to hikes in reserve requirements for commercial banks as early signs of policy normalisation.