Bank Indonesia to Hold Rate Amid Price Pressures: Decision Guide

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Indonesia’s central bank is expected to hold its key interest rate steady on Tuesday, while keeping a close watch on the spillover effects of surging global inflation and faster tightening by the Federal Reserve.

All 29 economists surveyed by Bloomberg expect Bank Indonesia to keep its seven-day reverse repurchase rate at a record-low 3.5%. That will be in line with Governor Perry Warjiyo’s stand that rate action is warranted only if there are signs of fundamental price pressures, which will become evident in core inflation that strips out volatile items such as energy and food.

Although the spike in global energy prices is creeping into Southeast Asia’s biggest economy, retail inflation has still remained below the midpoint of the central bank’s 2%-4% target range. That, together with a stable currency, allows Bank Indonesia the room to support economic growth.

With the Fed signaling a more aggressive rate path, expectations are for the nation’s central bank to “introduce caution in its guidance” on inflation, said Radhika Rao, an economist at DBS Bank Ltd.

Here’s what else to look for in Tuesday’s decision:

Price Pressures

Analysts are closely monitoring Indonesia’s inflation track after both headline and core inflation gauges accelerated at the fastest pace in two years. The readings are expected to quicken further on seasonal demand during the month-long Ramadan period, which ends early May, as well as a higher value-added tax rate and costlier non-subsidized fuel starting April.

Deputy Governor Dody Budi Waluyo said earlier this month that he sees annual headline inflation surging close to the top end of the target range for 2022. The government also said it’s mulling raising some administered prices in the coming months to ease the budget hit from subsidies.

“We’re seeing the risk of inflation rising above 4% if the government decides to raise prices of subsidized gasoline and liquefied petroleum gas, as well as the electricity tariff,” said Faisal Rachman, an economist at PT Bank Mandiri in Jakarta. Mandiri expects a 50-75 basis point rate hike in the second-half of this year. 

Fed’s Tightening

Most government bond yields climbed higher amid increasing selling pressures due to the Fed’s hawkish tone and escalated geopolitical risks from the Russia-Ukraine conflict. Indonesia’s 10-year sovereign bond yield is heading closer to 7%.

Despite the growing risk aversion in emerging market assets, the local currency has been among the least volatile among Asian peers. The rupiah is down only 0.7% year-to-date, thanks to a commodities boom that buoyed the country’s trade balance into 23 months of consecutive surpluses. 

That’s taken the pressure off the central bank to match step with its U.S. counterpart. But “if our expectations of the Fed to front-load 100 basis point rate hikes and to kick-start quantitative tightening in the second quarter materialize, BI might bring forward the start of its hiking cycle to this quarter,” said DBS Bank’s Rao. She sees a 75 basis points of rate hikes in 2022, with risks tilted to the upside.

Recovery Confidence 

The government is optimistic the economy’s recovery is gaining momentum, with household consumption rising amid higher mobility. Gross domestic product is seen growing above 5% through the first half of this year. 

For the full year, growth can still achieve the projected range of 4.7%-5.5%, according to David Sumual, an economist at PT Bank Central Asia. 

“Well-coordinated measures from the government and the central bank to anchor inflation expectation to keep the pace of economic recovery” steady is most important, Sumual said.

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