Indonesia: Central Bank stands pat in August
Latest bank decision: At its meeting on 20–21 August, Bank Indonesia (BI) decided to maintain the BI-Rate at an eight-year high of 6.25% and also kept the Deposit Facility (DF) rate plus the Lending Facility (LF) rate unchanged at 5.50% and 7.00%, respectively. The decision was in line with market expectations.
Monetary policy drivers: The key domestic factors influencing the BI’s decision on interest rates included the recent stabilization of the rupiah, plus the Bank’s aim to maintain inflation within the 1.5–3.5% target corridor for 2024 and 2025. Additionally, strong credit growth and foreign fund inflows also supported the decision to hold. Lastly, BI stood pat in anticipation of the U.S. Fed’s pivot in the coming weeks, due to its potential effect on exchange rates.
Policy outlook: BI did not provide any specifics on its upcoming policy rate decisions. That said, in a press briefing, Governor Warjiyo said he remained open to the possibility of a rate cut in Q4, with BI keeping rates stable until then to support the rupiah’s stability. The vast majority of our panelists foresee the BI-Rate remaining at the current level in Q3, before being cut by about 25 basis points in Q4; the rate reduction is forecast to take place after the U.S. Fed begins its monetary policy loosening cycle, likely in September. However, fiscal sustainability and rupiah instability are upside risks.
BI is scheduled to convene next on 17–18 September.
Panelist insight: Commenting on the meeting, Enrico Tanuwidjaja, economist at United Overseas Bank, stated:
“Though we keep our view for BI to start normalising its benchmark interest rate level to 5.75% in 1Q25, there is now risks that BI may cut in the immediate month after the possible start of Fed rate’s easing next month, on 19 Sep.”
Analysts at Nomura held a more dovish view:
“We maintain our forecast that BI will cut its policy rate by 25bp to 6.0% at its next board of governors meeting on 18 September, marking the start of its cutting cycle. […] Importantly, we think BI is starting to focus on growth, with the external backdrop turning more favourable for FX stability. In particular, the [BI’s] comment that domestic demand needs to be supported to maintain confidence is consistent with our view that the outlook for household spending is dimming, and that this will become increasingly the focus of BI in its policy decisions in the near-term. A shift to a more pro-growth stance paves the way for monetary policy to be recalibrated to become less restrictive.”