Bank Indonesia to hike interest rates on May 20, slim majority of economists said
FILE PHOTO: Visitors walk as they leave Bank Indonesia headquarters in Jakarta, Indonesia, January 17, 2019. REUTERS/Willy Kurniawan/File Photo
BENGALURU, May 19 : Bank Indonesia will hike its key policy rate by 25 basis points on Wednesday, according to a slim majority of economists in a Reuters poll who said the weak rupiah could lead the central bank to tighten policy.
The rupiah, already under pressure from concerns about fiscal management and central bank independence before the U.S.-Israeli war with Iran began on February 28, has dropped around 5 per cent since the conflict started, despite regular BI intervention in exchange markets, prompting economists to expect tighter policy.
Sixteen of 29 economists polled in the period May 11-18, expected BI to raise its benchmark seven-day reverse repurchase rate to 5.00 per cent on May 20, with the overnight deposit and lending facility rates also seen rising 25 basis points, to 4.00 per cent and 5.75 per cent respectively.
"I think the key rationale for a rate hike would be the depreciation of the rupiah in the past month," said Tay Qi Hang, an economist at the Economist Intelligence Unit.
"What it fundamentally boils down to is the lack of trust from the market in steps taken by BI and the Indonesian government to protect the rupiah. Investors think those measures have not been sufficient."
Still, almost half of economists expected BI to leave rates unchanged at 4.75 per cent.
"Indonesia's central bank appears increasingly concerned about the weakness of the rupiah but, for now, we suspect that it will continue to rely on FX intervention rather than hike interest rates," said Jason Tuvey, deputy chief emerging markets economist at Capital Economics.
Some economists said a rate hike, if delivered, could mark the start of a tightening cycle.
Referring to this week's meeting, Lavanya Venkateswaran, senior ASEAN economist at OCBC Bank, said: "Inflation has been benign recently, so it could be characterized as a pre-emptive hike, but we would not rule out further hikes from here."
Inflation was 2.42 per cent last month, within BI's 1.5 per cent-3.5 per cent target range, as government subsidies shielded most consumers from rising fuel prices.
Looking ahead, median forecasts from 20 economists showed the key rate ending the year at 5.00 per cent, but there was no consensus and several respondents did not provide forecasts for year-end.
(Other stories from the Reuters global economic poll)
