How Long Can Indonesia’s Central Bank Continue to Postpone an Interest Rate Hike?
At its latest monetary policy meeting, held on 18-19 April 2022, Bank Indonesia decided to leave its interest rates unchanged in an effort to facilitate the ongoing economic rebound. The benchmark interest rate (the BI 7-day reverse repo rate) was maintained at 3.50 percent, while the deposit facility and lending facility rates were kept at 2.75 percent and 4.25 percent, respectively.
However, it is interesting that in its latest monetary policy statement (released just after it concluded the April 2022 policy meeting) Bank Indonesia mentioned that it detects “a build-up of external pressure, particularly geopolitical tensions between Russia and Ukraine as well as sooner-than-expected monetary policy normalization in advanced economies”.
We write the words “sooner-than-expected” in bold because it points at something that was not previously calculated by Bank Indonesia. In fact, earlier, Bank Indonesia Governor Perry Warjiyo said he expects Bank Indonesia to raise rates in the fourth quarter of 2022 in anticipation of price pressures in 2023. However, since the latest monetary statement now implies that the US Federal Reserve is more aggressive in terms of monetary tightening than had been anticipated by Bank Indonesia, we may need to forget Warjiyo’s earlier words.
And while Bank Indonesia has been emphasizing over the past couple of months that it will particularly look at Indonesian inflation to decide whether or not to raise its benchmark rate, Indonesia’s central bank must have become a bit nervous seeing the Indonesian rupiah rate weaken toward the IDR 15,000 per US dollar threshold in late-April 2022 (although the suddenly weakening rupiah in late-April 2022 was probably particularly related to the Indonesian government’s decision to impose a ban on palm oil exports, and thus the damage might be undone once the government scraps the ban).
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