Strong economic fundamentals and the government’s decision to increase the subsidy budget could provide more room for Bank Indonesia (BI) to hold interest rates. Therefore, BI is predicted to maintain its benchmark interest rate this month.
Bank Indonesia is also expected to maintain the Deposit Facility interest rate at 2.75% and the Lending Facility interest rate at 4.25%.
Governor Perry Warjiyo and other members of the Board of Governors held a May 2022 Board of Governors (RDG) meeting on 23-24 May 2022.
Some market conventions predict the BI 7 Day Reverse Repo Rate (BI 7-DRR) to stay at 3.50%. Of the 15 institutions involved in establishing the convention, only two projects that BI will raise its benchmark interest rate this month.
If BI later maintains the BI 7-DRR, it means that the benchmark interest rate of 3.50% will last for the last 15 months. The 3.50% level is the lowest benchmark interest rate in the history of independent Indonesia
The Danareksa Research Institute for Economists Muhammad Ikbal Iskandar said BI will choose their benchmark interest rate this month despite inflation already soaring in April.
Moreover, the Central Statistics Agency (BPS) noted that Indonesia’s inflation skyrocketed by 0.95% (month to month/mtm) in April 2022, which was the highest level since January 2017.
On an annual basis (year on year / yoy), Indonesia’s inflation shot to 3.47%, or the highest since August 2019. The annual inflation is close to the upper limit of BI’s target of 2-4%.
BPS also noted that inflation in April reached 2.60% (YoY) which was the highest record since May 2020 or two years ago when inflation reached 2.65%.
The Ikbal inflation forecast for May will rise to 3.74% (yoy), close to the upper limit of BI’s target of 2-4%. He added that Indonesia’s economic fundamentals are still positive, starting from the current account, rupiah, and economic growth, to the trade balance.
The trade balance posted a surplus of $7.56 billion in April 2022, which is a record high. Meanwhile, economic growth was recorded at 5.01% (yoy) in the first quarter of 2022, and transactions recorded a surplus of US$ 221 million or 0.07% of Gross Domestic Product (GDP).
According to Refinitiv data, the rupiah weakened by around 0.3% last week, BI also noted an outflow of Rp 4.81 trillion in the Indonesian financial market last week.
DBS economist Radhika Rao expects BI to maintain its benchmark interest rate in May before turning hawkish in June or July.
“BI is likely to be hawkish in June or July due to high inflation. Inflation has kept rupiah-denominated assets under pressure. We estimate BI will raise interest rates by 75 bps this year,” said Radhika in a report on Indonesia: Fuel Prices, Subsidies, and Inflation – Balancing Act.
Radhika explained that the increase in the benchmark interest rate by 75 bps this year is similar to the Fed Funds rate (FFR). FFR is expected to rise by 175 bps this year.
“Several countries in Asia have also started tightening their monetary hikes,” said Radhika Rao. South Korea, India, and Malaysia are among the countries that have raised interest rates.