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Indonesia central bank trims growth outlook, holds fire on rates

Indonesia central bank trims growth outlook, holds fire on rates

FILE PHOTO: A view of Indonesia's Central Bank building in Jakarta August 1, 2012. REUTERS/Supri

JAKARTA : Indonesia's central bank cut its 2022 economic growth outlook on Tuesday amid risks from inflation and geopolitical tensions, while leaving interest rates at a record low to bolster the recovery from the COVID-19 pandemic.

Bank Indonesia (BI) kept the benchmark 7-day reverse repurchase rate at 3.50 per cent, as expected by all economists in a Reuters poll. It also left steady other policy rates for the overnight interbank money market.

BI has been adamant about maintaining low interest rates for as long as possible, even as other Asian central banks began to tighten monetary policy to temper a spike in commodity prices as the Ukraine-Russia war exacerbates supply chain disruptions.

Inflation in Southeast Asia's largest economy was still within BI's 2 per cent to 4 per cent target range, although consumer prices rose to a two-year high in March at 2.64 per cent.

Jakarta has been keeping a lid on inflation by subsidising some fuel prices and intervening in cooking oil prices, but officials have said they are considering energy price hikes.

Governor Perry Warjiyo said Indonesia currently has a negative output gap that will limit the inflationary impact from any price adjustment, but he stressed that BI will be ready to respond.

"Our monetary policy response will always be well calibrated, well communicated and the response can be in the form of reserve requirement hikes or interest rates," he told an online news conference. "...we will be extra careful in weighing between the need to maintain stability, including prices, and to support economic growth."

Meanwhile, Indonesia stands to benefit from surging commodity prices. Its exports have risen to record highs, leading BI to lower its current account deficit estimate to 0.5 per cent-1.3 per cent of GDP in 2022, from 1.1 per cent-1.9 per cent previously.

Analysts said an improving external balance will provide Indonesia with a cushion to confront global monetary tightening, including aggressive U.S. rate hikes, which in the past had triggered capital outflows and volatility in the rupiah.

Nonetheless, BI lowered its economic growth outlook for the year to 4.5 per cent-5.3 per cent, down from 4.7 per cent-5.5 per cent previously, citing slower global growth and a disruption in global trade from the Ukraine-Russia war.

"Slower growth and higher inflation mark an uneasy combination for many policymakers now, including for Bank Indonesia," said Wellian Wiranto, an economist at OCBC Bank.

"Going forward, despite such budding growth concerns, we expect BI to start to prioritise inflation fight," he added, predicting BI would start its rate hike cycle next month for a total of 100 basis points this year.

Capital Economics' Gareth Leather said that if the rupiah continues to remain stable, BI will likely not be in a hurry to tighten. The consultancy expected a 25 bps rate hike this year.

During the pandemic, BI cut interest rates by a total of 150 basis points and injected billions of dollars into the financial system. It began to unwind all of that with a reserve requirement ratio hike in March.

Source: Reuters

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