Bank Indonesia will cut its key interest rate next quarter and again in the fourth quarter, later than previously expected, as inflation rises and the rupiah weakens on renewed hawkishness from the U.S. Federal Reserve, a Reuters poll found.
A major hurdle for the central bank, whose main mandate is currency stability, will be cutting rates too soon as the rupiah hit a four-year low on Wednesday after comments from U.S. Federal Reserve officials boosted the dollar.
Inflation touched a seven-month high last month and moved closer to the upper limit of Bank Indonesia’s (BI) 1.5 per cent-3.5 per cent inflation target range, suggesting policy rates would need to remain higher for longer.
Over 80 per cent, or 29 of 35, of the economists in the April 16-22 poll expected the central bank to hold its benchmark seven-day reverse repurchase rate at 6.00 per cent at its April 23-24 meeting. Six expected a quarter-point hike.
“We recently pushed back our first rate cut forecast … given the movement of the rupiah on the back of fewer rate cuts expectation from the Fed by the market,” said Makoto Tsuchiya, an economist at Oxford Economics.
“If the central bank were to deter further currency weakness, a 25 bps (basis points) hike is unlikely to do much … BI will defend its currency by forex market intervention if necessary.”
Median forecasts showed the first quarter-point cut coming next quarter, compared to expectations for a cut in the second quarter in a poll in March, followed by another reduction to 5.50 per cent by the end of December, versus 5.25 per cent seen previously.
Reuters
