BI Preview: Forecasts from five major banks, monetary policy normalisation inevitable

Bank Indonesia (BI) will hold its monthly governor board meeting on February 9-10. Here you can find the expectations as forecast by the economists and researchers of five major banks regarding the upcoming central bank's decision. 

BI is set to stand pat this month but the central bank is expected to start rising rates faster than thought.

ING

“BI is expected to hold rates steady. We expect BI Governor Perry Warjiyo to consider tightening policy sooner rather than later, especially with inflation creeping back to its target. In our view, the trigger points for an earlier-than-anticipated reversal instance would be accelerating inflation coupled with depreciation pressure on the Indonesian rupiah linked to Fed tightening. We consequently forecast a modest rate increase from BI as early as 2Q.”

ANZ

“The timing of BI’s first rate hike will depend on the market reaction to the US Fed’s policy normalisation. As things stand, we don’t expect BI to hike its policy rate but the odds of an earlier-than-expected lift-off have risen.”

Standard Chartered

“We expect BI to keep the policy rate unchanged at 3.5% to anchor IDR stability and inflation expectations while keeping macroprudential policy accommodative to support growth. We believe BI will continue to calibrate monetary policy, including market intervention and interest rate policy, to maintain IDR and bond market stability amid more hawkish Fed policy normalisation and increasing domestic inflation. While inflation may only exceed the middle of BI’s target range of 2-4% in Q3, we think there is a risk of BI hiking rates earlier, in response to the Fed’s move should it trigger significant pressure on the currency. We see the first rate hike in Q3, but acknowledge the risk of an earlier hike in Q2 due to expectations of a more hawkish Fed move. Besides inflation, we think BI will watch real interest rates and 10Y government bond yield spreads with the US and EM peers to maintain IDR asset attractiveness.”

TDS

“BI could signal a less dovish tone as it adopts a ‘preemptive’ stance which raises the risk of an earlier rate hike. However, virus cases are rising while inflation is still relatively contained giving room for BI to stay patient.”

SocGen

“Surging Omicron cases are likely to make the central bank stay on hold and continue to support the nascent recovery until it can no longer afford to do so. The central bank is planning its first step towards liquidity draining via a 150bp Rupiah Reserve Requirement (RRR) hike on 1 March, we, therefore, expect BI to eventually hike the policy rate in 2Q22. For the time being, we think that the central bank will likely retain its existing accommodative stance and keep the policy rate unchanged at 3.5% in February to avoid inflicting any growth shock on the economy as Omicron rages.”