Bank Indonesia to hold rates through Q3 to support weak rupiah, cut in Q4: Reuters poll

BENGALURU : Indonesia’s central bank will keep its key interest rate on hold through next quarter to support a weak rupiah and only a slim majority expect a Q4 cut which would be after the likely start of policy easing in the United States, a Reuters poll found.

Bank Indonesia (BI) unexpectedly raised its seven-day reverse repurchase rate to 6.25 per cent last month – the highest since it made the instrument its main policy rate in 2016 – to bolster currency stability.

Since then the rupiah has gained over 1 per cent, suggesting pressure to continue tightening had eased somewhat but a rate cut was still months away as the currency is down about 3.5 per cent for the year, slightly less than some of its Asian peers.

The key interest rate is likely to be unchanged at 6.25 per cent at the conclusion of BI’s two-day meeting on May 22, all 33 economists in the May 13-17 poll said.

Median forecasts showed interest rates on hold through the third quarter, followed by a 25 basis point cut to 6.00 per cent before year-end.

“Persistent rupiah weakness means BI’s move is constrained by the dollar’s strength and what the Fed does, and we think the risks are skewed to a slower start of the rate cutting cycle,” said Makoto Tsuchiya, economist at Oxford Economics.

“We expect BI to keep utilising various policy tools other than the policy rate, including forex intervention. Modest investment growth in Q1 should make BI wary of over-tightening.”

To support the currency the central bank has been dipping into its forex reserves, which have fallen to $136 billion, down $4.2 billion in April alone – the biggest drop in 11 months.

Still, risks for the rupiah falling further remain high due to a hawkish Fed outlook with the first cut now expected in September and could be postponed further if economic U.S. indicators remain resilient, impacting BI’s rate outlook.

Among those who provided forecasts until year-end, a slim majority, 17 of 31, expected interest rates at 6.00 per cent or lower, but 14 saw them at 6.25 per cent or higher.

“A BI rate cut is highly unlikely in the face of the Fed’s prolonged hold,” said Elbert Timothy Lasiman, economist at Bank Central Asia.

“Domestically, there is little change, as BI would actually prefer to ease policy to support flagging growth. What changes is the global landscape, where…the market is starting to price in the possibility of “high for longer” again.”