MNI INSIGHT: Energy Costs Add Pressure On Indonesian CB For H2

Inflation pressures from higher energy costs will add a factor for Bank Indonesia to hike rates later this year for the first time since 2020, but a period of normalisation from pandemic conditions is still in play through the first-half of the year, MNI understands.

With inflation low, and falling back to 2.06% in February, MNI understands BI believes it has time to wait to change its accommodative monetary policy, which has held the benchmark seven-day repo rate unchanged at 3.5%. BI has an inflation target of 2% to 4%, see: MNI STATE OF PLAY: Indonesian Inflation Points To Tightening.

But BI expects price pressures will build, particularly energy costs, because of Moscow's invasion of Ukraine and lead to a weaker rupiah against the dollar as the Fed moves to tighten policy. The rupiah is currently around 13,375 against the USD.

Both factors will play into the timing of a rate hike in the second-half, though economic growth, which came in at 3.7% in 2021, is still expected to reach between 4.7% and 5.5% this year.

SOME MOVES TIGHTER

BI is already tightening policy, with an incremental increase in the rupiah reserve requirement for commercial banks kicking in this month, increasing to 5% from 1.5%, with another 1.5% to come in September.

MNI also understands that BI is considering a programme to sell some of the USD58 billion in Indonesian government bonds purchased during the pandemic crisis. No firm decision has been made but it is understood that BI may start unwinding its bond holdings from next year.