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Bank Indonesia to hold rates in July, calls for a hike grow louder

CNA – Bank Indonesia (BI) is likely to hold rates at a record low tomorrow, but one in three economists polled expected a 25 basis-point hike to shore up the rupiah currency and guard against capital outflows stemming from aggressive United States (US) rate hikes.

Faced with relatively low inflation, BI will wait at least one more month before it joins other central banks in raising interest rates, the latest poll found, an unchanged view from a June poll.

Last week, the Philippines and Singapore central banks surprised markets with out-of-cycle monetary policy tightening while Canada delivered a hefty 100 basis-point rate hike.

Although Indonesia’s inflation rose to a five-year high of 4.35 per cent in June, BI remains one of the few Asian central banks not to have lifted rates from a pandemic-induced record low.

In a July 11-18 poll, 18 of 29 economists, or around 60 per cent, said the central bank would keep its benchmark seven-day reverse repurchase rate at 3.50 per cent on July 21. Eleven expected a 25 basis-point hike.

“Bank Indonesia is expected to leave the benchmark rate on hold this week, citing manageable core inflation numbers and strong trade surpluses providing support to the rupiah,” noted DBS senior economist Radhika Rao.

People walk by Bank Indonesia in Jakarta. PHOTO: CNA

Core inflation, which BI said it would focus on more instead of the headline figure, is at 2.63 per cent, well within the two per cent to four per cent range. But a few economists expect it to inch closer to four per cent soon.

“Pressure to raise rates is nonetheless building as aggressive Fed rate hikes spur the dollar index sharply higher,” said Rao, who expects the first rate hike in either August or September.

A majority of economists agreed there was more tightening coming and saw rates reaching four per cent by the end of September. Fifteen of 20 respondents who had a view until the end of the year saw rates hitting 4.25 per cent or higher.

Among the smaller sample of respondents who had forecasts to the end of next year, six of nine saw rates at five per cent or higher – back where they were before the pandemic.

The poll showed inflation was expected to average 3.9 per cent this year and slip to 3.5 per cent in 2023, an upgrade from 3.4 per cent and 3.2 per cent predicted in April.

The rupiah currency, meanwhile, has lost around five per cent so far this year but has fared much better than nearly all of its peers. Some are concerned that the trend may not hold.

“BI’s upcoming rate decision is a close call, but we think recent external developments have tilted the odds toward BI finally pulling the trigger,” noted economist at ANZ Krystal Tan, who expects a 25 basis-point hike.

“Bucking the hawkish trend could risk BI being perceived as a laggard and intensify pressure on the IDR.”