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VIEW: HSBC Sees Rate Hike Risk If Rupiah Weakens

INDONESIA
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Bank Indonesia (BI) left rates at 6.25% at its May meeting as was widely expected. HSBC notes that the central bank is “running a dual policy” with high rates to keep inflation within the 1.5-3.5% target band and support the rupiah but also an easy macroprudential policy to boost lending and growth. HSBC continues to forecast 100bp of easing with a terminal rate of 5.25% by mid-2025.

  • “Given the revealed preference of BI to hike during periods of currency weakness, there are risks of further hikes if there is a renewed bout of USD strength. In addition, we believe BI will not front run the Fed on rate hikes and may even prefer a later and shallower rate cutting cycle. For now, our base case is for BI to cut rates starting 4Q24 (we expect the Fed to deliver its first rate cut in September).”
  • “We still expect 100bp of rate cuts, spread over 4Q24, 1Q25, and 2Q25. This should take the terminal policy rate to 5.25% by mid-2025, strategically higher than the 5% pre-pandemic level at end-2019, given frequent periods of dollar strength.”
  • “It went on to say that the strengthening in the rupiah in May by 1.7% against the USD was led by BI's monetary policy response in April, when it hiked rates by 25bp, which, as per BI, played a role in attracting capital inflows. Worth noting that the USD has also weakened 1.7% against a basket of major world currencies so far in May.”
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Bank Indonesia (BI) left rates at 6.25% at its May meeting as was widely expected. HSBC notes that the central bank is “running a dual policy” with high rates to keep inflation within the 1.5-3.5% target band and support the rupiah but also an easy macroprudential policy to boost lending and growth. HSBC continues to forecast 100bp of easing with a terminal rate of 5.25% by mid-2025.

  • “Given the revealed preference of BI to hike during periods of currency weakness, there are risks of further hikes if there is a renewed bout of USD strength. In addition, we believe BI will not front run the Fed on rate hikes and may even prefer a later and shallower rate cutting cycle. For now, our base case is for BI to cut rates starting 4Q24 (we expect the Fed to deliver its first rate cut in September).”
  • “We still expect 100bp of rate cuts, spread over 4Q24, 1Q25, and 2Q25. This should take the terminal policy rate to 5.25% by mid-2025, strategically higher than the 5% pre-pandemic level at end-2019, given frequent periods of dollar strength.”
  • “It went on to say that the strengthening in the rupiah in May by 1.7% against the USD was led by BI's monetary policy response in April, when it hiked rates by 25bp, which, as per BI, played a role in attracting capital inflows. Worth noting that the USD has also weakened 1.7% against a basket of major world currencies so far in May.”