Bank Indonesia to hold rates until second half of 2022 despite hawkish Fed

BENGALURU: Indonesia's central bank will wait until the second half of the year before raising rates to nurture economic growth, even though the US Federal Reserve looks likely to tighten monetary policy as soon as March, a Reuters poll showed.

Bank Indonesia (BI) Governor Perry Warjiyo said at its December meeting that normalisation of policy will not necessarily follow moves by the Fed, and that interest rates would remain low until inflation rises.

Unlike in the United States, where inflation is at a 40-year high, inflation in Southeast Asia's largest economy has been below the central bank's target range of 2%-4% for 19 months, giving it leeway to keep rates steady.

All 30 economists expected Bank Indonesia to hold its benchmark seven-day reverse repurchase rate at a record low of 3.50% at its Jan. 19-20 policy meeting.

"We still think BI will maintain the policy rate at 3.50% this month, taking into account that inflationary pressure still remains subdued," said Josua Pardede, chief economist at Bank Permata.

However, as Fed officials signal a rate hike this quarter, BI will be under pressure to kick off its own tightening cycle soon after to avert currency weakness and potential large capital outflows.

In a Jan. 11-17 Reuters poll, BI was expected to raise the seven-day repurchase rate by 50 basis points in the second half of this year in two stages, to 3.75% in the third quarter and then 4.00% in the fourth.

"While BI may prefer to keep the policy rate stable to support the economy, the central bank could still be forced to hike earlier than we assume if a more hawkish-than-expected Fed leads to a substantial depreciation of the IDR," noted economists at Barclays.

The Indonesian rupiah has remained stable amid an export boom due to a spike in commodity prices and was one of emerging Asia's best performers last year, depreciating only around 1.5% against the dollar.

Indonesia has reported a trade surplus since May 2020 but the surplus narrowed in December to its smallest in 20 months. Economists were also cautious, as a coal export ban imposed by the government could shift the trade balance to a deficit.

"The trade surplus may have peaked, and market volatility may rise as the US Fed reduces monetary support, which may impact portfolio flows into Indonesia," said Krystal Tan, economist at ANZ.

"On balance, an orderly US policy normalisation will likely see IDR weather this episode well, but any hasty action to arrest inflation may increase market uncertainty."

The poll also predicted inflation to rise, but stay within the BI's target range, averaging 2.9% and 3.1% for 2022 and 2023, respectively.

Indonesia's economy likely grew 4.7% in the last quarter of 2021 and 3.5% for the whole year. Full-year growth for this year and next was estimated at 5.1%.