Bank Indonesia Could Ease Rate Hikes To 25bps In December: Poll

Cooling inflation and a more resilient rupiah currency are expected to give Bank Indonesia enough comfort to opt for a more modest quarter-point interest rate hike on Thursday, a Reuters poll found.

Last week, major global central banks including the U.S. Federal Reserve slowed the pace of interest rate hikes as inflation showed signs of peaking while stressing that the fight was not over yet.

Bank Indonesia (BI), has increased interest rates by 175 basis points so far during the current raising cycle and was rewarded with lower-than-expected annual inflation fo 5.42 percent in November, making a smaller interest rate hike more likely at the next central bank policy review.

Over 90 percent of economists, 27 of 29, in the Dec. 13-19 poll expected BI to hike its benchmark seven-day reverse repurchase rate by 25 basis points to 5.50 percent at the Dec. 22 meeting.

The remaining two forecasts a 50 basis point rise.

“(We) did see a bit of a surprise on the downside for inflation, so that may give Bank Indonesia some space to just do the 25 (bps) instead of 50,” said Nicholas Mapa, senior economist at ING who also expects a smaller hike to provide more support to the rupiah currency.

“Given their mandate to provide FX stability, they’re likely to tighten further, but not as aggressively as previously because of the Fed’s downsizing of its own pace of tightening.”

Over 85 percent of respondents, 19 of 22, who had a long-term view expected Indonesia’s policy rate to reach 5.75 percent or higher by end-March 2023, a quarter point higher than November’s poll.

Median forecasts showed rates rising to 6.00 percent in the second quarter but then falling back to 5.75 percent by end-2023. One-third of respondents, 7 of 21, said rates would end next year at 5.75 percent, nine said it would be higher than that and five said it would be lower.

With a slower pace of rate hikes predicted from the Fed, the pressure on the rupiah, which has lost around 9 percent against the U.S. dollar this year is expected to subside, providing room for BI to scale down its pace of tightening.

“We don’t think domestic inflation dynamics warrant further outsized rate hikes; a more benign external environment should give the central bank some scope to slow the pace of tightening,” noted Krystal Tan, an economist at ANZ.

“We forecast its rate hiking cycle to end in Q1 2023, at a terminal rate of either 5.75 percent or 6.00 percent, depending on the amount of pressure on the IDR.”

Source Reuters

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