Indonesia’s central bank held policy rates steady in late December to support the rupiah and keep inflation at bay, but indicated there was room for monetary easing in the second half of 2024.

Bank Indonesia (BI) kept the benchmark 7-day reverse repurchase rate unchanged at 6.00 per cent, as widely expected by economists in a Reuters poll. Its two other policy rates were also kept steady.

While inflation in Southeast Asia’s largest economy has cooled faster than the central bank expected, growth has weakened this year amid shrinking exports driven by falling commodity prices and sluggish global trade.

BI has kept monetary policy tight due to volatility in the rupiah exchange rate, which has been hit by capital outflows as the Federal Reserve aggressively hiked interest rates. BI raised Indonesian rates by a total of 250 basis points rate between August 2022 to October.

The current level of its policy rate was consistent with BI’s focus on rupiah stability to ward off imported inflation and keep the inflation rate within target in the next two years, Governor Perry Warjiyo told a press conference.

Global market uncertainty has begun to ease, with policy rates in many central banks already at their peak, Warjiyo said, predicting the Fed would start cutting rates in the second half of 2024 by as much as 50 bps.

However, when asked if BI would follow the Fed’s footsteps, Warjiyo said: “No. We take (federal funds rate) into consideration but we will not follow. What we aim for is inflation within a 1.5 per cent to 3.5 per cent target range in 2024 and 2025.”

“We can better measure FX risks in the second semester of next year,” he added. “If the rupiah strengthens earlier and inflation can stay low, the room (for easing) may be open, but we will not rush.”The central bank said it expects upward bias in volatile food inflation next year due to supply issues, and policymakers will continue to monitor the situation.

BI maintained its outlook for GDP, forecasting 4.5 per cent to 5.3 per cent for this year and 4.7 per cent to 5.5 per cent in 2024.

Myrdal Gunarto, economist with Maybank Indonesia, said the earliest BI could trim policy rates was in May or June, as prices would peak during the Eid al-Fitr holidays in April. The magnitude of cuts will likely match the Fed’s easing, he added.

Capital Economics predicted BI would move before the second half of next year.

“… with economic growth set to struggle and inflation likely to remain subdued, we think easing will come sooner than that. We have cuts pencilled in for the central bank’s April meeting,” Ankita Amajuri, its economist said in a note.

All economists polled by Reuters before Thursday’s decision had expected BI would start loosening monetary policy in the third quarter of 2024.

The rupiah has strengthened in the past week as dovish comments by Fed policymakers boosted emerging market assets. The rupiah was largely unchanged after Thursday’s announcement.

Source: Reuters