Bank Indonesia kept its benchmark interest rate unchanged at 5.75% as universally expected at it’s April meeting. Guidance emphasized the need to avoid imported inflation and stability risks around a weaker rupiah which leaned against possible nearer-term easing given past indications to strengthen the rupiah exchange rate. BI said the decision came on the back of a stronger currency and easing price pressures. The benchmark 7-day reverse repurchase rate now stands at 5.75%, the deposit facility at 5.00% and the lending facility at 6.50%, their highest level since 2009 and in line with market forecasts. Since August last year the central bank has lifted rates by 225bps.
Indonesia is Southeast Asia’s largest economy and inflation cooled to 4% in May, earlier than BI had expected, having peaked at near 6% in September.
Rupiah
The rupiah has gained about 4% against the U.S. dollar so far in 2023r, making it the best performer among emerging Asian currencies. But it has come under pressure after recent hawkish comments by Fed officials pointing to more rate hikes.
Governor Perry Warjiyo reiterated that BI’s policy focus was on maintaining the stability of the rupiah currency’s exchange rate.
“We’re more focused on the medicine that will directly affect the rupiah’s stability, which is increasing the intensity of our (currency) intervention,” Warjiyo told a news conference, adding that policymakers did not mind the resulting decline in foreign exchange reserves.
The central bank will also increase the frequency of its forex term deposit auctions and introduce more tenors for its short-term forex deposits in order to allow banks to better manage their excess foreign currency liquidity.
| Key forecasts: |
|---|
| 2023 economic growth view retained at upper end of 4.5%-5.3% range. 1Q growth seen slightly above 5%; 2Q expansion of at least 5.1% 2023 Current account seen between a surplus of 0.4% to a deficit of 0.4% of gross domestic product. |
Inflation Issue
Indonesia’s annual inflation rate fell to a 12-month low of 4% in May of 2023 from 4.33% in April and below the market consensus of 4.22%, with food prices rising the least in 14 months (4.27% vs 4.58%). The inflation rate for the first time since May 2022 was at the upper end of its central bank’s 2-4% target range, after 11 months above the target range.
Prices moderated for housing (2.48% vs 2.53% in April), transport (10.62% vs 11.96%), furnishings (2.48% vs 3.27%), accommodation/restaurant (3.38% vs 3.79%), and clothing (1.54% vs 1.80%). At the same time, inflation was steady for education (2.75%). In addition, prices of information & financials dropped faster (-0.27% vs -0.25%).
Core inflation eased to an 11-month low of 2.66% in May from 2.83% in April, below forecasts of 2.8%. On a monthly basis, consumer prices edged up 0.09% in May, the least in six months, after a prior 0.33% rise, which was the highest in three months, and below the market consensus of a 0.3% gain.
To help aid economic activity, BI will redirect its liquidity incentives to banks that extend loans to sectors such as mineral processing, residential property and tourism. Currently, such incentives are given to banks lending to sectors badly hit by the COVID-19 pandemic such as aviation.
From The TradersCommunity Research Desk