Bank Indonesia Q3 rate lever pull, June move possible

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BANGALORE – Despite rising inflation and aggressive measures by the US Federal Reserve, the Bank of Indonesia will wait a few more months to raise rates from record lows, according to a Reuters poll by economists showing that growing minorities expect an increase next month.

Although inflation rose to 3.47% in April, the highest in more than four years, it is still within Bank Indonesia’s 2% -4% target, suggesting that the central bank is not under immediate pressure to raise interest rates.

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All but two of the 27 economists in the May 12-19 survey expected Bank Indonesia (BI) to hold its benchmark seven-day reversal rate at a record low of 3.50% at its May 24 meeting. The two expected a 25 basis point increase.

About one-third of respondents, 8 out of 27, said the first rate increase would be in June, and the remaining 17 said it would come to the monthly meeting in July-September.

“Over the next month, we expect policymakers to lay the groundwork for a sharp 1Q22 GDP, rising inflation and soft currency, a sharp pivot to make uncomfortable policy settings uncomfortable,” said Radhika, a senior economist at DBS Bank. The first rate increase is expected to come in Q3.

“With the rapid pace of the US rate hike cycle as well as domestic considerations, regional central banks have begun to normalize policy ahead of time to anticipate inflation and the effects of the second round.”

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If the BI meets its expectations, inflation will remain within its targets this year, with economists saying it will accelerate growth.

But if inflation breaks above the target, there is a risk of further action, as has happened recently in Malaysia and India.

“Recent economic and financial market developments support the start of BI’s rate lift-off with the forthcoming meeting,” said Crystal Tan, an economist at ANZ, who expects a 25 basis point increase at the next meeting.

“Economic activity has returned to pre-epidemic levels, while inflation is picking up. These developments soon prompted BI to change its position without delay. Even if the BI does not rise in May, it is likely to get worse. ”

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Either way, further interest rates are likely to rise.

Of the 27 respondents, 24 are expecting a rate of 4.00% or higher in the last year, of which six are 4.00%, 11 4.25%, five 4.50% and two 4.75%. The other three said the rate would reach 3.75% by the end of the year.

From a small sample, most of the respondents who predicted to move towards the end of next year, 11 out of 18, saw the rate hit 5.00% or more, where they were before the COVID-19 epidemic. The two expected rates will hit 5.75% by then. (Reporting by Devyani Sathian; Polling by Arash Mogre and Prerna Bhatt; Editing by Ross Finlay, Alexandra Hudson)

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