Bank Indonesia to Hold Rates Steady Next Week, Expected to Cut in Q4 After Fed's Move
By Rahul Trivedi
In an exclusive Multibagger poll, it has been revealed that Bank Indonesia (BI) is set to maintain its interest rates unchanged in the upcoming week to bolster the rupiah. However, analysts predict a rate cut in the next quarter following the anticipated policy loosening by the U.S. Federal Reserve on Sept. 18.
With inflation well within BI's target range of 1.5%-3.5% since mid-2023, Governor Perry Warjiyo emphasized in August that this quarter's focus would be on supporting the rupiah's exchange rate against the U.S. dollar. A robust currency aids in managing inflation through cheaper imports.
The expectations of the Fed cutting rates by at least 75 basis points this year have propelled the rupiah to appreciate by almost 5% against the dollar in August. This appreciation provides BI with flexibility to implement fewer rate cuts compared to the U.S. central bank.
Based on a survey conducted from Sept. 9-12, 30 out of 33 economists anticipate that BI will maintain its benchmark seven-day reverse repurchase rate at 6.25% during its two-day meeting on Sept. 18. The overnight deposit facility and lending facility rates are also projected to remain unchanged at 5.50% and 7.00%, respectively.
According to Brian Lee Shun Rong, an economist at Maybank, "BI will continue to closely monitor the rupiah while acknowledging the necessity for a more accommodative monetary policy to stimulate growth."
The median forecasts indicate that the first 25 basis points cut is likely to happen in the next quarter, a prediction consistent with the July survey results. Analysts foresee BI reducing rates by 100 bps to 5.25% by end-2025, while the Fed is expected to lower rates by 175 bps for the same period.
Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, commented, "I...see BI adopting a gradual and measured approach to rate cuts over the next 12 to 18 months compared to other regional central banks, which may opt for more aggressive cuts in response to the Fed's aggressive stance."
Analysis:
In summary, Bank Indonesia is likely to maintain its interest rates in the near term to support the rupiah amid favorable economic conditions. However, a rate cut is on the horizon for the next quarter following the Fed's expected policy easing. This could impact borrowing costs, investment decisions, and overall economic activity in Indonesia. As an investor or individual, it's crucial to monitor these developments to make informed financial choices and understand how they may influence your financial well-being.