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Indonesia keeps dovish tone on steady core CPI and Fed rate outlook
INDONESIA’S central bank continued to build the case to keep its policy rate unchanged for longer, as it sees subsiding food costs and slower global monetary tightening.
Bank Indonesia (BI) will continue to normalise monetary policy, but there is no need to quickly raise interest rates like other countries, Governor Perry Warjiyo said in a briefing late Monday (Aug 1).
Core inflation is “still low”, while food prices should ease in the coming months, he said. The Federal Reserve is also expected to take a less aggressive stance in September with a 50-basis point rate hike amid growing fears over a US recession, he added.
The governor’s comments could set the stage for yet another hold this month, solidifying Indonesia’s position as one of the world’s last interest-rate holdouts. Policy makers have prioritised aiding the recovery of South-east Asia’s largest economy, which Warjiyo said likely grew 5.05 per cent last quarter.
Consumer prices in South-east Asia’s biggest economy jumped 4.94 per cent in July, the most in nearly 7 years, the national statistics agency said on Monday. It beat the median forecast of 4.82 per cent in a Bloomberg survey of analysts, and marked the second straight month that it’s breached Bank Indonesia’s 2-4 per cent target.
However core inflation — the metric watched by the central bank in deciding on its interest-rate policy — crept up to 2.86 per cent in July, still in the lower half of the monetary authority’s target range.
That could suggest that Bank Indonesia will likely be comfortable holding the policy rate this month, said economists Brian Tan and Shreya Sodhani at Barclays Bank. They expect a 25-basis points rate hike in September, followed by another 2 in the last quarter.
“The latest inflation results helped to keep monetary conditions accommodative. Current conditions imply that BI has scope to normalise monetary policy in the coming months without sacrificing too much economic growth,” said Jeff Ng, senior currency analyst at MUFG Bank, who also predicts BI will begin raising borrowing costs next month.
PT Bank Danamon Indonesia maintains its view that the policy rate will be raised this quarter as core inflation has continued to pick up since October and is testing the 3 per cent threshold, said economist Wisnu Wardana. Still, “if monetary policymakers hold up to their judgment on core inflation, there’s a good chance that BI’s key benchmark rate will remain unchanged this month”.
Indonesia’s inflation in July was still mainly driven by the price of food items like red chili, cooking oil and shallots amid unusual weather like heavier rainfall and supply-chain bottlenecks. Volatile food inflation accelerated further to 11.47 per cent in July, an 8-year peak, according to data compiled by Bloomberg.