MNI STATE OF PLAY: Stable Indonesia Waits For Likely H2 Hike

With expectations of a US rate rise this week and Russia's war on Ukraine driving momentum for global inflation, Indonesia’s central bank is likely to deliver some clarity on its own plans for policy tightening this week.

Bank Indonesia’s board of governors begins a two-day meeting on Wednesday, with no expectations of a change in the policy rate, which has been held at 3.5% since September 2020. But Governor Perry Warjiyo’s post meeting comments will be closely scrutinized for indications on the timing of any rate rise, see: MNI INSIGHT: Energy Costs Add Pressure On Indonesian CB For H2.

STABLE RUPIAH, LOW INFLATION

Indonesia is currently enjoying the benefits of benign inflation, a stable currency and an economy which is growing again as it re-opens after the pandemic lockdowns. Foreign debt is low, and February’s $3.8 billion trade surplus beat expectations.

February headline inflation was 2.06%, at the lower end of the 2% to 4% target ,and the economy is forecast to grow by between 4.7% and 5.5% this year.

COMMODITY VIEWS

With these conditions, BI is under no immediate pressure to increase rates although it has already moved to tighten liquidity for commercial banks, with an incremental increase in the rupiah reserve requirement for commercial banks, beginning with a 1.5% increase to 5% from March and another 1.5% by September.

Warjiyo has emphasised the need for stability, but this week’s meeting could give some fresh views on inflation, given the global situation and Indonesia’s status as a commodity producer and exporter.

BI watchers will anticipate new guidance on when rates will increase, with the market expecting two hikes of 25 basis points later this year.

The bank is also likely to keep rates on hold until at least June, however, and details of the board of governors meeting will be announced on Thursday afternoon in the Asian time zone, just after the Federal Reserve releases its latest policy views on Wednesday in the U.S.