Bank Indonesia to Pull Rates Lever in Q3, June Move Possible

BANK INDONESIA / BI - BENGALURU. Bank Indonesia will wait a few more months to raise rates from a record low despite rising inflation and aggressive moves by the U.S. Federal Reserve, according to a Reuters poll of economists that showed a growing minority expect a hike next month.

Although inflation surged to 3.47% in April, the highest in more than four years, it is still within Bank Indonesia's 2%-4% target range, suggesting the central bank is not under immediate pressure to raise interest rates.

All but two of 27 economists in the May 12-19 poll expected Bank Indonesia (BI) to hold its benchmark seven-day reverse repurchase rate at a record low 3.50% at its May 24 meeting. Two expected a 25 basis point hike.

Nearly one-third of respondents, 8 of 27, said the first rate rise would be in June, and the remaining 17 said it would come at one of the monthly meetings in July-September.

"Next month, we expect policymakers to lay the ground for a hawkish pivot, factoring in a firm 1Q22 GDP, rising inflation and softer currency, to unwind accommodative policy settings," said Radhika Rao, senior economist at DBS Bank, who with the majority expects the first rate rise to come in Q3.

"With the U.S. rate hiking cycle on a fast lane as well as domestic considerations, regional central banks have begun to normalise policy earlier than anticipated to contain inflationary expectations and second-round effects."

If BI is correct in its expectation inflation will remain within its target this year, economists say it will deliver a gradual pace of hikes.

But if inflation breaks above target there's a risk of an earlier move, as happened recently in Malaysia and India.

"Recent economic and financial market developments support the case for BI to start its rates lift-off as soon as the upcoming meeting," said Krystal Tan, economist at ANZ, who is expecting a 25 basis points hike at the upcoming meeting.

"Economic activity is back above pre-pandemic levels... while inflation is gaining momentum. These developments add impetus for BI to shift its stance sooner rather than later. Even if BI doesn't hike in May, it is likely to take on a more hawkish stance."

Either way, further interest rate rises are likely.

Twenty-four of 27 respondents expected rates at 4.00% or higher by end-year, including six saying 4.00%, 11 at 4.25%, five at 4.50% and two at 4.75%. The remaining three said rates would only get to 3.75% by year-end.

A majority of respondents from a smaller sample who had forecasts going to the end of next year, 11 of 18, saw rates hitting 5.00% or higher, back to where they were before the COVID-19 pandemic. Two expected rates to hit 5.75% by then.