MNI STATE OF PLAY: Pressure On Indonesian CB To Hike Rates

Pressure is mounting on Indonesia’s central bank to raise interest rates for the first time since September 2020 as inflation gains momentum and a weakening currency reduces the attractiveness of local assets for foreign investors.

Bank Indonesia’s Board of Governors goes into what is expected to a “live” meeting this week, and while the expectation is a steady reverse repo rate at 3.5% monetary tightening is considered to not be far away, (See: MNI INSIGHT: Indonesia CenBank Sees A Window To Drive Recovery).

The rupiah has been on a slide this year as the USD has surged, and could soon test the 15,000 level against the USD and neighbouring Malaysia has already acted to shore up the ringgit, (See: MNI INSIGHT: Stable Ringgit Key As Malaysia CenBank Tightens).

INFLATION FACTOR

Inflation hit a five-year high of 4.35% in June, up from 3.55% in May and above BI’s 2% to 4% target. This is the first time in five years inflation has been above the target.

Arguing against a rate hike is that core inflation, BI’s preferred measure, is at 2.6% and inside the target range.

The Indonesian economy has benefitted from high commodity prices and government subsidies have kept a lid on prices as growth has rebounded. But earlier forecasts for growth this year are now seen as too ambitious. BI’s growth forecast is 4.5% to 5.3%.

BI’s Board of Governors begin their two day meeting on Wednesday, with the decision due on Thursday afternoon in the Asian time zone.