Indonesia will raise interest rates by another 25 basis points in September, some are calling for 50 basis points according to a Reuters poll

Indonesia will raise interest rates by another 25 basis points in September, some are calling for 50 basis points according to a Reuters poll

By Anant Chandak

BENGALURU (Reuters) – A Reuters poll expected the Bank of Indonesia to follow a surprise rate hike in August with another 25 basis point increase at its meeting on Thursday, still moving slower than most of its peers in an attempt to bring down inflation.

Generous energy support curbed inflation, at 4.69% in August, allowing Bank Indonesia (BI) to delay rate hikes until last month, lagging behind most other central banks.

But most economists surveyed expect inflation to rise to around 6% by the end of the year, well above BI’s 2%-4% target range after the government removed some of its subsidies. This raised fuel prices by about 30%, putting pressure on the central bank to tighten monetary policy faster.

A Reuters poll from Sept. 13-19 showed that 27 out of 30 economists expect the International Investment Bank to raise its seven-day benchmark reverse repo rate by 25 basis points to 4.00% on Thursday.

The other three expected a larger increase of 50 basis points.

โ€œAfter sitting outside the hawkish camp for much of the year, Bank Indonesia surprised with an increase in August, which in our view was an attempt to increase subsidized fuel prices,โ€ writes Radhika Rao, chief economist at Bank Indonesia. DBS Bank.

โ€œThe price guidance is expected to emphasize that the magnitude of policy tightening will be primarily driven by the need to stabilize domestic inflation expectations, rather than influenced by the trajectory of global central banks.โ€

British investment bank Governor Perry Wargio said the central bank will raise interest rates further, but that its policy tightening will not be as strong as the US Federal Reserve.

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Reuters Poll: Bank Indonesia 7-day reverse repo rate forecast

Economists in the survey expected business intelligence to accelerate its tightening pace. Nearly half, 13 of 27, expect the central bank will raise interest rates to 4.75% or higher by the end of 2022, to return to what they were before the COVID-19 pandemic.

While rates were expected to rise even higher, there was no clear consensus among economists until the third quarter of 2023 when it topped 40%, eight of 19, forecasting rates at 5.25% or higher.

“Inflation is now likely to remain above target until late next year,” said Gareth Leather, the institute’s chief Asian economist. “This raises the risks of second-round effects and increase underlying price pressures, which the central bank has promised to protect against.” Capital Economics.

โ€œWe expect the policy rate to reach 4.5% by the end of the year, with the possibility of two additional increases of 25 basis points in 2023.โ€

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