Indonesia: Central Bank leaves rates unchanged in July
At its meeting on 16–17 July, Bank Indonesia (BI) decided to keep the BI-Rate steady at 6.25% for the third meeting in a row. The Board also maintained the Deposit Facility (DF) rate at 5.50% and the Lending Facility (LF) rate at 7.00%. Market analysts had correctly anticipated the decision.
The key domestic factors influencing the Central Bank’s decision on interest rates were primarily centered around keeping inflation within its 1.5–3.5% target for this year and next, coupled with coordination efforts with the government to curb inflation through the National Movement for Food Inflation Control (GNPIP) and other measures. BI also aimed to support economic growth and to strengthen the rupiah and attract foreign capital.
The BI did not provide any specifics on its upcoming policy rate decisions. That said, in a subsequent press briefing, Governor Warjiyo said he remained open to the possibility of a rate cut in Q4 if there were no external shocks, as domestic economic growth is solid and inflation is low. The vast majority of our panelists foresee the BI-Rate remaining at the current level in Q3 and being cut by 25 basis points in Q4. The rate reduction is forecast to take place after the U.S. Fed begins its monetary policy loosening cycle, which the BI expects in November. However, fiscal sustainability and rupiah instability are upside risks.
Commenting on the meeting, Enrico Tanuwidjaja and Agus Santoso, economists at United Overseas Bank, stated:
“We maintain our view that external volatility is the reason for BI rate to be steady this year. However, we don’t exclude the possibility (which is also in line with BI’s view) for BI to start easing along with cooling global inflation, as well as easing global interest rates, especially the Fed. Uncertainty ahead of the US election is also expected to change the global economic landscape, especially on trade and dollar performance going forward.”
On the other hand, analysts at Nomura declared:
“Given our relatively cautious view on BOP [balance of payments] dynamics, we continue to expect BI’s cutting cycle to start only in Q1 2025, for a total of 100bp cuts to 5.25%. We believe BI will be patient and more willing to delay its rate cutting cycle to much later than the Fed’s (our US team sees a September cut) in a bid to keep interest rate differentials supportive of FX stability, which as evident in today’s comments is still BI’s main policy priority.”