BI Preview: Forecasts from four major banks, taking it easy despite surging inflation

Bank Indonesia (BI) will hold its monthly board meeting on 18-19 April. Here you can find the expectations as forecast by the economists and researchers of four major banks regarding the upcoming central bank's decision. 

The BI is expected to hold its benchmark seven-day reverse repurchase rate unchanged at a record low of 3.50%. Meanwhile, BI is set to closely watch the spillover effects of surging global inflation and faster tightening by the Federal Reserve.

ANZ

“We expect BI to keep its policy rate unchanged but we suspect its policy messaging will turn less dovish. Inflation is set to intensify in April following the VAT rate hike (from 10% to 11%) and the upward adjustment to Pertamax fuel prices. Firming domestic demand will also add to demand-side price pressures. Further out, the government has also hinted that prices for subsidised 3kg LPG and the widely used Pertalite fuel may also be raised, and if materialized, this would further exacerbate price pressures and second-round effects. Coupled with an increasingly hawkish US Fed, we think it is becoming more difficult for BI to remain as patient as it would have liked. We are currently reviewing our forecasts for the central bank to hike its policy rate by 75bps this year, with the risks tilted toward an earlier and more aggressive rate hiking cycle.”

SocGen

“BI seems to believe that the economic scarring endured during the pandemic will continue to need supportive monetary policy, while we expect the much-improved tax revenue collection engendered by high commodity prices to provide an adequate fiscal cushion to the government in its endeavour to protect the poorer sections of society through subsidy schemes without jeopardising fiscal consolidation. With BI’s debt monetisation scheme (along with buoyant exports because of elevated commodity prices) providing support to bond yields and the currency, the central bank has the luxury of being able to retain supportive monetary policy. Despite faster-rising headline inflation – we have revised up our 2022 headline CPI forecast from 2.9% YoY to 3.6% – we expect BI to keep the policy rate (7-day reverse repo rate) at 3.5% at its meeting in April and to announce its first rate hike only in 3Q22.”

ING

“BI has kept policy rates at accommodative levels to support the economy’s recovery from the fallout from Covid. BI Governor Perry Warjiyo hinted that he would consider tightening policy should core inflation become a problem. With recent inflation reports showing a pickup both in headline and core inflation, we can expect Warjiyo to signal a potential rate hike in the near-term, contingent on further acceleration in price pressures.”

Standard Chartered

“We expect BI to keep the policy rate unchanged at 3.5% to anchor IDR stability and inflation expectations. BI’s governor said the central bank will hike policy rates gradually to support growth, despite the Fed indicating a possibility of faster and higher rate hikes. A relatively stable IDR should allow BI to keep interest rates low. BI has indicated that it would hike policy rates only in response to a fundamental increase in inflation, while likely using liquidity measures and open-market operations to stabilise the market in the near-term. We continue to expect the first rate hike in Q3, as inflation pressure has started to build due to improving demand, higher global commodity prices, the VAT hike, and domestic energy price adjustments. We expect inflation to exceed BI’s inflation target of 2-4% in Q3, from 2.6% YoY in March.”