Anna 
In a bid to shore up the rupiah and control inflation, Indonesia’s central bank, Bank Indonesia (BI), opted to maintain policy rates unchanged on Thursday. The decision to keep the benchmark 7-day reverse repurchase rate at 6.00% aligns with expectations from economists in a Reuters poll. BI also held steady its two other policy rates.
Despite a faster-than-expected cooling of inflation in Southeast Asia’s largest economy, the nation has grappled with weakened growth throughout the year. The economic slowdown is attributed to dwindling exports fueled by declining commodity prices and subdued global trade.
BI’s commitment to a tight monetary policy stems from the volatility in the rupiah exchange rate, which faced capital outflows amidst aggressive interest rate hikes by the U.S. Federal Reserve. Between August 2022 and October, BI raised Indonesian rates by a total of 250 basis points.
Governor Perry Warjiyo, in a press conference, emphasized that the current policy rate level aligns with BI’s primary focus on maintaining rupiah stability. This approach aims to mitigate imported inflation and ensure the inflation rate stays within the target range for the next two years.
As global market uncertainty begins to alleviate, Warjiyo noted that many central banks have already reached their peak policy rates. He predicted the Federal Reserve would initiate rate cuts in the second half of 2024, possibly by as much as 50 basis points.
However, Warjiyo clarified that BI would not necessarily mirror the Fed’s actions, stating, “We take (federal funds rate) into consideration but we will not follow. What we aim for is inflation within a 1.5% to 3.5% target range in 2024 and 2025.”
When questioned about the possibility of easing, Warjiyo hinted at potential room for maneuvering in the second semester of the next year, contingent on factors such as a strengthening rupiah and sustained low inflation. He underscored, “If the rupiah strengthens earlier and inflation can stay low, the room (for easing) may be open, but we will not rush.” BI also anticipates an upward bias in volatile food inflation next year due to supply issues, pledging ongoing vigilance.
BI maintained its GDP outlook, forecasting growth between 4.5% and 5.3% for this year and 4.7% to 5.5% in 2024. Economists have varied opinions on the timing of potential rate cuts, with May or June speculated as the earliest, matching the Fed’s easing magnitude, according to Myrdal Gunarto, an economist with Maybank Indonesia. Capital Economics, however, anticipates a move even earlier, penciling in cuts for BI’s April meeting. Despite dovish comments by Fed policymakers buoying emerging market assets, the rupiah remained largely unchanged after Thursday’s announcement.
