MNI STATE OF PLAY: Indonesian Inflation Points To Tightening

Strong momentum for growth and the highest inflation rate since May 2020 will play into a tightening bias for Indonesia’s central bank, which is expected to begin to raise official rates later in the year.

While Bank Indonesia is likely to keep its policy rate unchanged at 3.5% at this week’s Board of Governor’s meeting, the bank’s outlook is being shaped by January inflation data showing the consumer price index rose by an annualized 2.18%, driven by higher food and housing costs, the fastest increase since December 2019.

This week, Statistics Indonesia reported that 2021 GDP growth was 3.69%, following a 2.07% contraction the previous year. The Finance Ministry is now projecting 2022 growth of 5.2%.

ALREADY READY

BI has already set the scene for monetary tightening with the decision to hike Rupiah Reserve Requirements (RRR) for commercial banks, with the rate due to rise by 150 basis points in March and another 150 basis points later in the year.

The economy is seen as well prepared for any repeat of the “taper tantrum” which roiled Southeast Asia when the U.S. Fed tightened policy in 2013. Indonesia posted a trade surplus of USD35 billion last year, the highest in almost 15 years as commodity prices surged.

BI Governor Perry Warjiyo has hinted that the next move in rates, which have been unchanged since 150 basis points of cuts in 2020, will be up. But BI is expected to wait and see how the recovery plays out, and also the impact of likely rising U.S. rates in March, before making its own move.

BI's interest rate decision will be announced on Thursday afternoon in the Asian time zone.