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 normalization 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 percent-4 percent 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 percent at its Jan. 19-20 policy meeting.
“We still think BI will maintain the policy rate at 3.50 percent this month, taking into account that inflationary pressure still remains subdued,” said JosuaPardede, 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 percent in the third quarter and then 4.00 percent 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 percent against the dollar.
