Indonesia central bank sits tight on rates, sees room for easing in second half 2024

JAKARTA :Indonesia’s central bank stood pat on its main policy rates at its last meeting for the year on Thursday, as expected, and indicated there may be room for monetary easing in the second half of 2024.

Bank Indonesia (BI) kept the benchmark 7-day reverse repurchase rate at 6.00 per cent, where it has been since October. It also kept overnight policy rates steady.

While inflation in Southeast Asia’s largest economy has cooled faster than the central bank expected, growth has weakened this year amid shrinking exports driven by falling commodity prices and sluggish global trade.

BI Governor Perry Warjiyo told a press conference the decision to maintain rates was “consistent with the focus of pro-stability monetary policy, to strengthen the stability of the rupiah exchange rate, as well as pre-emptive and forward looking steps to ensure inflation remains under control within the target of 1.5 per cent to 3.5 per cent in 2024”.

BI maintained its outlook for GDP, forecasting 4.5 per cent-5.3 per cent for this year and 4.7 per cent-5.5 per cent in 2024.

BI has raised interest rates by a total of 250 basis points since August, 2022, a tightening cycle aimed at taming then-rising inflation and stabilising the rupiah exchange rate, which has been volatile this year due to capital outflows as the United States hiked its interest rates.

When asked if Indonesia would follow in the Federal Reserve’s footsteps, Warjiyo said, “no”.

The decision on interest rates will depend on domestic inflation, he said, adding that the central bank sees lower FX risks in the second half next year and this may give it room to loosen monetary policy.

But he added there was a possibility the Fed would cut rates in the second half of 2024 by as much as 50 basis points.

Indonesia’s inflation returned to BI’s target range earlier than expected this year. In November, inflation was 2.86 per cent, within BI’s 2 per cent to 4 per cent range in 2023 and 2024’s new inflation band of 1.5 per cent to 3.5 per cent.

All economists polled by Reuters had expected BI to leave rates unchanged, predicting its board of governors would start loosening monetary policy in the third quarter of 2024.

The rupiah has strengthened in the past week as dovish comments by Federal Reserve policymakers boosted emerging market assets. The rupiah was largely unchanged after Thursday’s announcement.