BENGALURU – Bank Indonesia (BI) will keep its key interest rate unchanged at 5.75 percent next week and leave it there for the rest of the year as inflation is set to remain within the central bank’s 2-4 percent target range, a Reuters poll of economists found.
Headline inflation in Southeast Asia’s largest economy eased to a 14-month low of 3.52 percent in June and core inflation to 2.58 percent, suggesting BI can hold rates steady, despite expectations policymakers in the U.S., Britain and the euro zone will hike interest rates further.
With inflation expected to stay within the central bank’s 2 percent-4 percent target range the focus was now on maintaining the stability of the Indonesian rupiah.
READ: Indonesia’s June inflation eases to lowest in 14 months
The currency is up about 4 percent for the year against the dollar but has come under pressure after recent hawkish comments by Fed officials pointing to more U.S. rate hikes, suggesting BI would remain cautious in its monetary policy.
All 31 economists in the July 14-19 Reuters poll expected Indonesia’s central bank to hold its key seven-day reverse repurchase rate at 5.75 percent at the conclusion of its July 24-25 meeting.
A strong majority of economists, 20 of 28, forecast BI to hold the benchmark policy rate at that level for the rest of the year, with only eight expecting a rate cut of at least 25 basis points by then.
“Governor Perry Warjiyo’s latest comments continue to suggest the central bank is wary of cutting its policy rate prematurely, lest this trigger a backlash against the IDR (rupiah) if global risk sentiment sours,” noted Brian Tan, an economist at Barclays.
“This likely would be exacerbated with the trade balance recently turning less supportive for the external accounts, even as renewed focus on the possibility of more rate hikes from the U.S. Federal Reserve will likely keep BI cautious in the near term.”
READ: Indonesia June trade surplus bigger than expected
Indonesia posted an unexpectedly large trade surplus of $3.46 billion last month, despite weak exports, as imports plunged faster than expected. This has fueled speculation among investors BI would cut rates before year-end.
But median forecasts in the poll showed a 25-basis-point rate cut to 5.5 percent in the first quarter of 2024.
Unlike its other Asian peers, BI may be cutting rates earlier, with inflation expected to average 3.8 percent this year and further decline to 3 percent next year, staying within BI’s 2 percent to 4 percent target range.
While exports boosted Indonesia’s economy in 2022, the resource-rich country’s growth was expected to slow this year due to moderating commodity prices and the faltering Chinese economy, the country’s largest trade and investment partner.
Economic growth was forecast at 4.9 percent this year, down from 5.3 percent in 2022. It was then expected to rise to 5 percent next year.