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BI to stay dovish until late 2022, but no more rate cuts
The stance balances between muted inflation in Indonesia and the Fed's accelerated tapering plan.
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The facade of Bank Indonesia (BI) headquarters in Jakarta on May 8, 2014. (AFP/Romeo Gacad)
B
ank Indonesia (BI) is to hold its loose monetary policy stance a little longer than initially expected but without a rate cut as a balance between the country's muted inflation and United States (US) Federal Reserve’s accelerated taper plans.
BI initially planned to keep a pro-growth stance this year and then shift to a pro-stability stance next year. The central bank has maintained the seven-day reverse repo rate (7DRRR) at a record-low 3.5 percent since February in a bid to support economic recovery.
However, BI Governor Perry Warjiyo said on Wednesday that the central bank would only reduce liquidity in banks starting 2022 and hold the current low rate “until there are signs of early rise in inflation".
Economists specifically expect BI to hold the rate until the second half of 2022 with a gradual easing of other monetary support.
“The pressure on stability will not be huge yet in the first half of 2022, supported by commodity prices that will stay high amid the gradual economic recovery as the government carefully eases [mobility curbs],” Bank Mandiri economist Faisal Rachman told The Jakarta Post in a text message on Thursday.
“In the second half, domestic demand will strengthen and it will raise inflation and imports, so stabilization from the monetary side will be necessary.”
Economists at Bank Mandiri forecasted on Nov. 18 that BI would raise the benchmark rate by 50 basis points (bps) to 4 percent in the second half of next year. The central bank is expected to reduce its bond-buying program first before the rate hikes.
