Indonesia central bank raises rates by 25 bps, as expected

© Reuters. FILE PHOTO: People cross a main road outside a shopping mall during afternoon rush hours in Jakarta, Indonesia, November 30, 2022. REUTERS/Willy Kurniawan

By Gayatri Suroyo and Fransiska Nangoy

JAKARTA (Reuters) -Indonesia’s central bank raised its key policy rate on Thursday but at a slower pace than in recent months, reaffirming that inflation was coming under control while forecasting a slower pace of economic growth next year.

Bank Indonesia (BI) raised the benchmark 7-day reverse repurchase rate by 25 basis points (bps) to 5.50%, as expected by the majority of economists polled by Reuters, after three consecutive 50 basis point hikes since September.

It also reiterated its aim to keep the rupiah stable, while announcing a new instrument to boost the onshore supply of dollars and shore up the currency by encouraging banks to pass exporters’ foreign currency savings to the central bank.

“The decision to increase interest rates in a more measured manner is a follow-up step for a front-loaded, pre-emptive and forward-looking way to ensure the continued decline in inflation and inflation expectations, so that core inflation is maintained within the range of 2% to 4%,” Bank Indonesia Governor Perry Warjiyo said.

In total, BI has hiked rates by 200 bps since August.

The inflation rate in Southeast Asia’s largest economy jumped in September to a seven-year high of 5.95%, after the government raised subsidised fuel prices early that month.

Inflation has since cooled, and while November’s rate of 5.42% remained above the central bank’s 2% to 4% target range, Warjiyo said it was below the central bank’s forecast and inflation expectations were declining.

He expected headline inflation would not exceed 5.4% in December and would come down to 3% by the end of next year.

Analysts expected Bank Indonesia would continue to hike rates into early next year, but not for much longer.

“The softer inflation reading – combined with the general outlook for growth challenges in 2023 – convinced the central bank that a less forceful rate hike should be rolled out today,” ING economist Nicholas Mapa said.

He still anticipated more hikes next year given that the Fed was likely to continue raising U.S. rates.

Consultancy Capital Economics expected that the central bank would nevertheless end its tightening spell early next year.

“We expect a further 50 bps of total hikes over the coming months before the central bank brings its tightening cycle to a close in early 2023,” its economist Gareth Leather said.

With global economic growth seen slowing and some countries facing recession risks next year, the central bank forecast that Indonesia’s 2023 GDP growth would weaken to the middle of a 4.5% to 5.3% range, compared with the upper end of that band this year. Last year’s growth was 3.7%.

Bank Indonesia also continued to expect the rupiah to strengthen next year to reflect Indonesia’s strong export performance, Warjiyo said.

The rupiah was broadly unchanged against the dollar and moving within a tight range after Thursday’s announcement. It has fallen around 9% this year, with the U.S. currency buoyed by the Federal Reserve’s aggressive monetary tightening.

While pressure on the currency had eased since last month, Warjiyo said uncertainty would stay high through 2023 and this could limit capital inflows to emerging markets such as Indonesia.

Bank Indonesia will also continue its so-called “operation twist” in the bond market, selling short-dated bonds and standing by to purchase long-term notes, aiming to attract porfolio investors while managing borrowing costs for the government, Warjiyo said.