BENGALURU: Bank Indonesia (BI) kept its key interest rate unchanged at 6.25 percent on Wednesday but plans to cut it by 25 basis points next quarter, earlier than previously expected, with the US Federal Reserve likely to start easing monetary policy in September, a Reuters poll showed.
Inflation has remained within the central bank’s target range of 1.5% to 3.5% since July 2023, but the weakening rupiah — down about 4.5% this year — has put pressure on the central bank to keep interest rates higher for longer, as currency stability is its main mandate.
All 35 economists in the survey, conducted July 8-12, expected the central bank to keep its benchmark seven-day reverse repo rate unchanged at 6.25% at the end of its two-day meeting on July 17.
“We expect Bank Indonesia to keep interest rates unchanged in July. While a policy that keeps inflation under control is favourable, the driving force behind interest rate policy over the past year has not been inflation but Bank Indonesia’s explicit policy of stabilising the exchange rate,” Radhika Rao, senior economist at DBS Bank, wrote.
“At the last review, BI Governor Perry acknowledged that these risks plague the currency, but maintained his view that USD/IDR would likely move back below 16,000 once a clearer picture emerges, paving the way for rate cuts.”
Bangko Sentral ng Pilipinas Governor Perry Warjiyo said last week that there may be room for interest rate cuts next quarter as the rupiah is expected to become more stable, but for now the focus will be on efforts to maintain currency stability.
The median forecast indicated rates would remain unchanged this quarter, but projected a 25 basis point decline to 6.00% in the fourth quarter. In the June survey, consensus forecasts predicted the first rate cut would come in the first quarter of 2025.
Among economists who provided outlooks for the end of 2024, there was no clear consensus on what policy rates would be.
Eighteen people expected rates to fall below 6.00%, while 13 expected them to remain at current levels and one person predicted they would rise 25 basis points to 6.50%.
Sanjay Mathur, chief economist for Southeast Asia and India at Australia and New Zealand Banking Group, said: “With global uncertainties still elevated and the US dollar/Indonesian rupiah strengthening, BI remains cautious and continues to prioritise currency stability.”
“We continue to view a change in Fed policy as a prerequisite for BI to consider following suit.”
Inflation is expected to average 2.9% and 3.0% this year and next, and the economy is forecast to grow by about 5.0% in both years.
(See other articles in the Reuters World Economy Survey)
