Indonesia raised its benchmark interest rate by another quarter-point in a move that brings the central bank near the end of its tightening cycle, with Governor Perry Warjiyo saying policymakers have acted sufficiently on inflation.
(Bloomberg) — Indonesia raised its benchmark interest rate by another quarter-point in a move that brings the central bank near the end of its tightening cycle, with Governor Perry Warjiyo saying policymakers have acted sufficiently on inflation.
Bank Indonesia increased the seven-day reverse repurchase rate to 5.75% on Thursday, the highest in more than three years, as seen by 23 of 28 economists surveyed by Bloomberg. The rest had predicted a pause. Neighboring Malaysia unexpectedly maintained its key rate as a darkening global outlook poses risks to the economy.
“The decision to increase interest rates in a more measured manner is a follow-up step to be front-loaded, pre-emptive and forward looking, ensuring the continued decline in inflation expectations and future inflation,” Warjiyo said. “BI believes the increase by 225 basis points since August is sufficient” for price gains to return to the 2%-4% target this year, he said.
The central bank must also consider economic growth, the governor said as dimming global prospects pose risks to the growth momentum of Southeast Asia’s biggest economy amid waning exports and a strengthening local currency.
“It appears that BI is telling us that this is the last hike in the cycle and that the strength in the rupiah has or will do some of the heavy lifting,” said Mitul Kotecha, head of emerging market currency strategy at Toronto Dominion Bank in Singapore.
The central bank reaffirmed its 2023 gross domestic product growth estimate at the mid-point of 4.5%-5.3% and a current account that could range from a surplus to deficit equivalent to 0.4% of GDP, according to Warjiyo. Headline inflation will be below 4% in the second half while the core gauge should be within target in the first six months of 2023, he said.
Economic recovery is also supporting the rupiah, the governor said. The currency, which is the second best performer in Asia with a 3.1% gain against the greenback this year, pared an earlier loss to trade at 15,104 per dollar after the decision.
The rupiah has advanced along with other regional currencies, propped up by foreign investors returning to emerging markets amid signs of cooling US inflation and a downshift in Federal Reserve’s tightening.
Appreciating currencies help ward off imported inflation but they’re bad news to exporters especially during times of weaker global demand. While the trade surplus set a new full-year record at $54.5 billion in 2022, exports have continued to shrink since hitting a high in August.
The “tone from BI suggests they may be close to peak with attention shifting to the growth outlook,” said Nicholas Mapa, senior economist at ING in Manila. “In the coming months, BI will likely be watching growth dynamics especially if domestic growth starts to stall due to fading export growth.”
Still, policymakers must continue to closely-watch price pressures which unexpectedly picked up last month, and with no less than President Joko Widodo calling attention this week to rising costs of food staples. Prices typically rise in time for the month-long celebration of Ramadan from March.
–With assistance from Norman Harsono, Eko Listiyorini, Soraya Permatasari, Yudith Ho, Tomoko Sato, Matthew Burgess and Chester Yung.
(Updates with comments from governor and analysts.)
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