Indonesia central bank raises rates by 25 bps, as expected

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JAKARTA — Indonesia’s central bank raised its key policy rate on Thursday, its fifth rate hike since August and widely expected by markets, as it aims to bring inflation back within target next year.

Bank Indonesia (BI) hiked the benchmark 7-day reverse repurchase rate by 25 basis points (bps) to 5.50%, as expected by the majority of economists polled by Reuters.

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The central bank has raised interest rates by a total of 200 bps since August, including three back-to-back 50-bp increases in the previous three monetary meetings.

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“The decision to increase interest rates in a more measured manner is a follow-up step for a front-loaded, pre-emptive and forward-looking way to ensure the continued decline in inflation and inflation expectations, so that core inflation is maintained within the range of 2% to 4%,” Bank Indonesia Governor Perry Warjiyo said.

The inflation rate in Southeast Asia’s largest economy jumped in September to a seven-year high of 5.95%, after the government raised subsidized fuel prices early that month.

Inflation has since cooled, but November’s rate of 5.42% remained above the central bank’s 2% to 4% target range.

Warjiyo on Wednesday said headline inflation was expected to stay around 5.4% in December and come down to 3% at the end of next year.

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The rupiah was broadly unchanged against the dollar and moving within a tight range after the announcement. It has fallen around 9% this year, with the U.S. currency buoyed by the Federal Reserve’s aggressive monetary tightening.

Warjiyo has said he expected the rupiah to strengthen next year, predicting global financial markets would be less volatile once major central banks are done with their monetary tightening.

On Thursday he said the pressure on the rupiah had eased in November and December.

For gross domestic product growth, the central bank’s outlook had a bias towards the upper end of a 4.5% to 5.3% range in 2022, Warjiyo said, and with GDP growth in the middle of that same band next year.

Capital Economics said that signaled more rate hikes ahead from BI before an end to its tightening spell early next year.

“This should give the central bank the confidence to press ahead with more rate increases in the near term,” it said in a client note.

“We expect a further 50 bps of total hikes over the coming months before the central bank brings its tightening cycle to a close in early 2023.” (Reporting by Gayatri Suroyo, Fransiska Nangoy and Bernadette Christina Munthe; Editing by Martin Petty and Edmund Klamann)