MNI STATE OF PLAY:Bank Indonesia Balances Timing On Tightening

Indonesia’s central bank meets this week and momentum for inflation and a weakened rupiah are likely to be top of the agenda.

While Bank Indonesia’s Board of Governors are not expected to hike the benchmark seven day reverse repo rate from 3.5%, a pre-emptive rate rise should not be ruled out, See: MNI STATE OF PLAY: Indonesia CB Sees Risks To Benign Inflation.

Regardless of this week’s decision, BI would appear to be close to tightening monetary policy since it cut rates to the current level in 2020. Headline CPI inflation, which was at 2.06% in February, has increased to 3.47% in April against BI’s target range of 2% to 4% and consumer prices are increasing at the fastest pace since 2017.

BI has said it expects inflation to stay within its target range this year, and Governor Perry Warjiyo has said he is hopeful that further increases in the Rupiah Reserve Requirement Rate may be enough to bring inflation under control. The RRR has been increased 1.5% to 5% with another 1.5% due in September.

BONDS, RUPIAH, MALAYSIA

Warjiyo has also said the central bank could consider selling off some of the US$58 billion in bonds it purchased directly from the government as part of its pandemic response in combination with a reserve ratio requirement hike.

Meanwhile, the stability of the rupiah has been undermined by global factors such as rate rises in the U.S., Ukraine War, and the Covid-19 lockdowns in China, while the ban on palm oil exports – reversed last week – has also hurt the currency.

The Indonesian unit has weakened in the last month by just over 1% to sit at 14,655 against the USD this week, plumbing fresh year lows.

BI is balancing a need for accommodative policy settings to support the domestic economic recovery with the risk of inflation and currency weakness.

Like neighbouring Malaysia, where the central bank hiked rates in a pre-emptive move on inflation earlier this month, the timing of the tightening cycle is likely to be a key discussion point at this week’s Board of Governors meeting, the result of which will be announced late Tuesday in the local time zone, See: MNI STATE OF PLAY: Malaysia Moves Early With Rate Hike.