Indonesia Set for Smaller Rate Hikes as Inflation Fear Contained

(Bloomberg) — Indonesia’s central bank could settle for quarter-point moves at its upcoming policy rate meetings after September inflation came in lower than estimates despite the fuel price hike, economists said.

The impact of higher gasoline prices is more subdued than expected, while food costs have likely peaked with the onset of the harvest season, according to Maybank Investment Banking Group economist Lee Ju Ye. The bank trimmed its forecast for Indonesia’s 2022 average inflation to 4.5% from 5.2%.

To be sure, the increase in transport fares and the rebound in consumer demand should keep price gains elevated in the coming months, before peaking at 6.5% in early 2023, Citigroup Inc. economist Helmi Arman said. He expects Bank Indonesia to raise the key rate by 25 basis points at each of its October and November meetings.

“While we do not think that it will move by similarly big increments in the coming meetings – especially if the currency volatility stays relatively contained – we do think that more tightening is to come,” said Oversea-Chinese Banking Corp.’s Wellian Wiranto, who also sees quarter-point hikes through January.

Here’s a round-up of economists’ views:

Enrico Tanuwidjaja, PT Bank UOB Indonesia

  • Bank Indonesia can opt for slower pace of rate hikes in the absence of Federal Reserve rate meeting this month.
  • Core inflation — an indicator closely watched by the central bank –remained largely stable at 3.2% in September, indicating that consumer demand is “still relatively sluggish.”

Suryaputra Wijaksana and Barra Kukuh Mamia, PT Bank Central Asia

  • While the full impact of the fuel price hike has yet to be borne out, the inflation spike should be “mostly expected” and would require “nothing extraordinary relative to previous rate hike cycles” when it typically tightened policy by 150-175 basis points.
  • Policy makers will focus squarely on alleviating pressure on the rupiah, with much of today’s unpredictability in global factors. Interventions will likely intensify in the FX and bond markets.

Brian Tan, Barclays Bank Plc.

  • Bank Indonesia’s “preemptive and forward-looking” stance could mean half-point hikes are still likely, especially given how late it has been in joining the global policy normalization cycle.
  • The central bank could also take “short pauses” in its hiking cycle, similar to what it did in 2018, though the timing is uncertain.
  • Barclays downgraded its 2022 average inflation forecast to 4.3% from 5.2%, settling just above the central bank’s 2%-4% target range.