Bank Indonesia playing catch-up, to deliver another 50 bps rate hike on Thursday: Reuters poll

By Devayani Sathyan

BENGALURU (Reuters) – Bank Indonesia (BI) will deliver a second successive half-point interest rate hike on Thursday in an attempt to catch up with its peers and curb inflation stemming partly from a weaker rupiah, a Reuters poll found.

Relatively lower inflation allowed the central bank to hold off with raising rates until August. But in September inflation reached 5.95%, the highest since 2015, and will likely push the central bank to continue tightening.

BI, until recently one of the world’s last dovish central banks, followed a modest quarter-point rate rise in this cycle with a surprisingly aggressive 50 basis point rise in September.

Nearly 60% of respondents, 17 of 30, in an Oct. 11-17 poll said the central bank would hike its benchmark seven-day reverse repurchase rate by 50 basis points to 4.75% at its Oct. 20 meeting. The remaining 13 forecast a 25 basis point hike.

“With the IDR (rupiah) under pressure, reserves falling and price pressures building, we think the odds are tilted in favour of Bank Indonesia maintaining a ‘pre-emptive’ stance and delivering a 50bp hike at its upcoming meeting,” noted Sanjay Mathur, chief economist, Southeast Asia and India at ANZ.

“Stabilising the IDR was one of the factors cited behind September’s decision to go with an outsized hike, and the current IDR weakness, coupled with a thinning reserve buffer, will raise the impetus for another assertive response.”

The weaker rupiah, down more than 8% so far this year, has prompted economists to bring forward their rate hike expectations.

A majority of them, 19 of 26, now expect rates to end this year at 5.00% or above, rather than reach that level by end-March as predicted in a September survey.

Nearly 70%, 15 of 22, who offered long-term rate forecasts, now see rates reaching at least 5.25% by end-March. Rates were then expected to stay there until end-2023 at least as inflation will continue to run above the central bank’s target range of 2%-4%.

Graphic: Reuters Poll: Indonesia inflation and monetary policy outlook

The poll showed inflation was expected to average 4.6% this year and inch down to 4.5% in 2023, a massive upgrade from 3.9% and 3.5% predicted in July.

However, with core inflation still within the target range, 13 of 30 economists expected a moderate 25 basis point rate rise this week, though some saw a risk of a steeper hike given core inflation was expected to rise further.

“To delay (inevitable?) rate hikes, BI moved away from targeting headline inflation to targeting core inflation, but with the core measure exceeding the median target of 3.0% yoy for a second time in a row, the central bank may no longer be in a happy place,” noted Kunal Kundu, economist at Societe Generale (OTC:).

“While we expect a 25bp hike at the upcoming policy meeting, a bigger hike might be required to insulate the IDR from further weakness.”

The economy was forecast to expand 5.2% this year and 5.0% in 2023.

(For other stories from the Reuters global long-term economic outlook polls package:)

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