Bangalore (Reuters) -Bank Indonesia will keep its key interest rate at 3.50 percent on Thursday, but a Reuters poll found that more than a quarter of economists expect a rate hike to combat import inflation caused by a weak rupiah as the US Federal Reserve tightens aggressively.
Indonesia’s central bank is one of only a few major Asian central banks that has not raised rates from a pandemic record low since inflation has stayed within its target range of 2% to 4%.
But a Fed rate hike of 75 basis points last week and the possibility of more aggressive moves in the coming months caused the rupiah to fall by 2%, its worst weekly performance in almost three years.
Still, in the most recent poll, taken from June 13–20, 23 of 32 economists said they thought the central bank would keep its benchmark seven-day reverse repurchase rate at a record low of 3.50 percent at its meeting on June 22–23.
“Banque Indonesia’s policy dashboard is likely to focus less on domestic growth and inflation and more on financial stability and outflow risks,” said Radhika Rao, a senior economist at DBS Bank. “This will make it possible for the cycle of rate hikes to begin in July.”
Still, 9 out of 32 people think that BI will follow the lead of its Asian peers and raise rates by 25 basis points, to 3.75 percent.
Krystal Tan, an economist at ANZ, predicts a 25 basis point rise. “Unless the current pressure on the IDR eases before BI’s meeting, the wiser move is a rate hike, or at least clear signals that a rate lift-off is close,“ she said.
“If BI doesn’t change its position, it could be seen as the only regional laggard, which would put more pressure on the IDR.”
This year, the currency of the country with the biggest economy in Southeast Asia has dropped by almost 4%, with half of that drop happening in the last week. This makes people worry about imported inflation in a country with more than 270 million people.
Price pressures have been pretty mild up until recently. But rising energy and food prices around the world have pushed inflation close to the upper band of the BI’s target. It reached 3.55 percent in May, the highest level in over four years.
At the policy meeting in May, Governor Perry Warjiyo said that inflation would go above the target range this year, but he predicted that it will go down next year.
“The upward trend is likely to continue because of other factors, such as higher food price inflation and the pass-through from rising input costs and higher minimum wages,” said economists at Nomura, who expect inflation to rise above 4 percent by the end of Q3.
Poll medians showed that the BI, which meets once a month, will start raising rates next quarter. By the end of the third quarter, the rates will have gone up by a total of 50 basis points, taking them to 4.00 percent.
Seventeen economists who expect the first hike to happen in Q3 said BI would go up by 25 basis points, eight said 50 basis points, and two said 75 basis points.
But, according to the poll, BI will not be aggressive during this cycle. The key rate was expected to rise by 75 basis points by the end of the year, to 4.25 percent, and to 5.00 percent by the end of 2023.