BENGALURU (Reuters) – Bank Indonesia (BI) is expected to leave its policy rate unchanged at record lows on Tuesday, a small majority of economists estimate in a Reuters poll. BI is one of a few major Asian central banks that have not lifted interest rates from pandemic-era levels despite many policymakers around the world raising them to battle high inflation. In an Aug. 12-19 poll, 16 of 27 economists, or nearly 60%, said it would keep its benchmark seven-day reverse repurchase rate unchanged at 3.50% at its Aug. 23 meeting.
Eleven economists expect the central bank to raise rates by 25 basis points to 3.75%.
While growth in Southeast Asia’s largest economy has stayed strong there are signs of price pressures heating up.
Calls for a rate hike gathered pace after last quarter’s growth showed the economy had outperformed expectations. However, Dody Budi Waluyo, the central bank’s deputy governor told Reuters BI would only raise rates when it sees a persistent rise in core inflation.
While headline inflation rose to a seven-year high of 4.94% in July, core inflation was 2.86% and within the BI’s 2% to 4% target range.
“The main reason for BI to hold rates is due to benign core inflation, reflecting that demand recovery is not yet robust enough for a rate hike cycle. BI will wait until core inflation heats up,” said Irman Faiz, economist at Bank Danamon Indonesia.
“On top of that, IDR is quite resilient.”
Among 13 of the 16 economists who said the central bank would keep policy rates unchanged at the upcoming meeting and provide long-term forecasts, 10 said it would move in September. The remaining three forecast it would wait to raise rates in the fourth quarter. Several economists have warned about capital outflow pressures if Indonesia keeps rates on hold as other countries raise rates, adding further pressure on the rupiah which is down about 4% this year.
The poll found economists expect further tightening ahead. The rate was seen reaching 4.25% by end-2022, with eight of 22 forecasting rates to go even higher. Among the smaller sample of respondents who had a view until end-2023, 10 of 15 saw rates at 4.75% or higher, including six who forecast borrowing costs to reach 5.00% or higher – where they were before the pandemic.
Source: Economy - investing.com
