POLL-Bank Indonesia to Hold Rates at 5.75% in Feb After Six Straight Increases

BANK INDONESIA / BI - BENGALURU. Bank Indonesia (BI) will leave its key interest rate unchanged at 5.75% on Thursday, attempting to mark an end to a short six-month long hiking cycle even as U.S. and European policymakers continue tightening policy, a Reuters poll of economists found.

Inflation in Southeast Asia's largest economy hit a seven-year high of 5.95% in September amid rising global food and energy prices but slowed to 5.28% in January.

BI expects inflation to return to its 2% to 4% target range in the second half of this year, providing the central bank space to assess the impact of previous rate hikes were having on household spending and inflation.

At the Jan. 19 meeting, Governor Perry Warjiyo said interest rates were already at adequate levels to bring down inflation, suggesting BI's policy tightening was done.

That stands in sharp contrast with the U.S. Federal Reserve, which has been raising rates for nearly a year and is expected to hike by 25 basis points at least twice more.

A strong majority of respondents, 26 of 30, in the Feb. 7-13 Reuters poll expected BI to keep its benchmark seven-day reverse repurchase rate unchanged at 5.75% on Thursday. The remaining four forecast a 25 basis point rise.

"The governor has already mentioned he sees the current rate as a sufficient level, even though he didn't explicitly mention he will stop (raising). But it was a signal they are going to pause," said Irman Faiz, economist at Bank Danamon, noting core inflation slipped to 3.2% in January.

INFLATION FORECAST

A separate Reuters poll a few weeks ago showed gross domestic product (GDP) growth will average 4.8% in 2023, down from 5.31% in 2022. Inflation was also forecast to fall below BI's 4.00% upper target band by end-September.

A like-for-like analysis of the latest poll and last month's survey showed more than half of respondents had lowered their peak rate projection for the first quarter of 2023 to 5.75% from 6.00%.

While nearly one-third kept their forecasts unchanged, only two revised them upwards.

Despite growing concerns the Fed will take rates higher than markets have been pricing in, the Indonesian rupiah was still up 2.8% against the dollar this year.

That was likely to take some pressure off the central bank to support the currency through higher rates.

"Unless there are clear signs that suggest the U.S. Fed's terminal policy rate is likely to surpass BI's expectation of 5.25%, we maintain that the latter's rate-hike cycle has ended," noted Bansi Madhavani, senior economist at ANZ.

"Although the IDR, like other regional currencies, has come under some downward pressure after a strong U.S. jobs report, it is still stronger than it was at the start of 2023."

Median forecasts showed BI was expected to keep interest rates unchanged throughout this year, and not lower them until the first quarter of 2024.