BENGALURU- Bank Indonesia (BI) will keep its key interest rate at 6.25 percent on Wednesday but will cut it by 25 basis points next quarter, earlier than previously expected following the likely start of policy easing by the US Federal Reserve in September, a Reuters poll found.
While inflation has stayed within BI’s 1.5 percent -3.5 percent target range since July 2023, a weak rupiah – down around 4.5 percent this year – has pressured the central bank to maintain higher rates for longer as currency stability is its main mandate.
All 35 economists in the July 8-12 poll expected the central bank to hold its benchmark seven-day reverse repurchase rate at 6.25 percent at the conclusion of its two-day meeting on July 17.
“We expect the BI to keep rates on hold in July. While the disinflationary path is conducive for policy, Bank Indonesia’s explicit FX stability mandate, rather than inflation, has been the driver of its rate actions in the past year,” wrote Radhika Rao, senior economist at DBS Bank.
“At the last review, BI Governor Perry acknowledged that these risks have troubled the currency but retained his view that USD/IDR will return to sub-16000 as more clarity emerges, which would then pave the way for rate cuts.”
BI Governor Perry Warjiyo said last week there could be room for an interest rate cut next quarter as the rupiah is expected to become more stable, but for now, the focus will remain on efforts to maintain currency stability.
Median forecasts showed no change to interest rates this quarter but predicted a 25 basis point drop to 6.00 percent in the fourth quarter. In a June survey, the consensus view predicted the initial cut in the first quarter of 2025.
