BI to Hold Rates at 5.75-Percent For Rest of 2023

Bank Indonesia (BI) will keep its key interest rate unchanged at 5.75-percent for the rest of the year to maintain the stability of the Indonesian rupiah, similar to most of its Asian peers, as inflation continues to ease, a Reuters poll found.

Inflation, at 3.27-percent in August, has stayed below the central bank’s 2 to 4-percent target range over the past few months, but rising U.S. Treasury yields and concerns over an economic slowdown in China have put pressure on the rupiah.

BI was expected to keep rates on hold to support the currency, down 1.3-percent this year.

All 31-economists in a September 8 to 18 Reuters poll expected BI to maintain its benchmark seven-day reverse repurchase rate (IDCBRR=ECI) at 5.75-percent at the conclusion of its two-day policy meeting on September 21.

“BI would prefer to keep rates on hold while weighing global uncertainties versus domestic considerations. So while inflation is still within its own official target, I think rupiah stability will be paramount,” said Radhika Rao, senior economist at DBS.

“BI are trying to balance FX stability risks vis-a-vis domestic considerations, and at this point they would lean more towards FX stability especially because trade surpluses are narrowing,” report Reuters.

With the U.S. Federal Reserve expected to continue its ‘higher for longer’ mantra, the rupiah was predicted to weaken further or trade in a tight range, likely keeping rate cut expectations at bay for now.

Reuters say that among economists who had a long-term view, forecasts were largely unchanged from an August poll, and more than 60-percent (18 of 28) forecast BI to keep rates on hold at 5.75-percent until year-end.

Nine predicted at least one 25-basis points cut by then, and one saw rates at 6.0-percent.

The median forecast showed a 25-basis-point rate cut to 5.50-percent in the first quarter of 2024.

“We are expecting BI to follow the fed funds rate trajectory first. BI is going to be more reactive instead of proactive in shifting gear to the rate cut cycle,” said Irman Faiz, economist at Bank Danamon.

A total of 75-basis points in rate cuts to 5.00-percent were forecast by end-2024, less than the 100-basis points in cuts expected in the previous survey.

Source: Reuters, Reporting by Devayani Sathyan; Polling by Veronica Khongwir and Susobhan Sarkar; Editing by Hari Kishan and Jan Harvey

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