MNI STATE OF PLAY: Weaker Rupiah Weighs On Indonesia's CenBank

Indonesia’s central bank meets this week with a weakening currency increasing the pressure to raise interest rates, which have been unchanged since September 2020.

Bank Indonesia’s board of governors goes into a two-day meeting on Wednesday and while it is expected that it will keep the key reverse repo rate unchanged at 3.5%, the bank could also spring a hawkish surprise and seek to pro-actively address the emerging challenges of the weaker currency, which is undermining the attractiveness of Indonesian bonds for foreign investors.

The rupiah has been on a slide so far this year, and has fallen 4.5% to 14,837 against the USD with half of the losses in recent weeks. Inflation, however, is relatively benign and is within Bank Indonesia’s 2% to 4% target, with May CPI at 3.55%.

After the last meeting in April, BI Governor Perry Warjiyo said that while the economy is recovering, the bank was downgrading its 2022 growth forecast to between 4.5% and 5.3%, down slightly from the previous estimate of 4.7% to 5.5%. Indonesia’s economy grew by 3.7% in 2021, (See: MNI STATE OF PLAY:Bank Indonesia Balances Timing On Tightening).

The economy has benefitted from strong commodity prices driving export receipts that have created rising trade surpluses.

While monetary policy has remained broadly accommodative, BI has 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.

BI’s decision will be announced on Thursday afternoon in the Asian time zone.