(Bloomberg) -- Indonesia’s central bank is approaching the point where it can start easing borrowing costs as the rupiah keeps strengthening and inflation stays modest. Most economists aren’t convinced that it will happen this week though, before the expected US rate cut.
Bank Indonesia will leave the BI-Rate unchanged at 6.25% for a fifth straight month on Wednesday, according to 26 of 36 economists in a Bloomberg News survey. The rest expect a quarter-point reduction to 6%.
Even as more economists joined the dovish camp ahead of the Sept. 18 decision, the consensus was for Governor Perry Warjiyo to stick to his guidance of starting loosening in the fourth quarter. The BI, whose key mandate is currency stability, will likely wait for the Federal Reserve to commence easing, intent on giving the rupiah more headroom before embarking on its own rate cuts.
The policy rate remains at its highest since 2016, despite inflation cooling to well within the central bank’s 1.5%-3.5% target.
“Although global and domestic developments continue to support an eventual start to the BI cutting cycle, it is unclear whether they are enough to move forward BI’s rate cut timeline from the 4Q previously guided,” said Citigroup Inc. economist Helmi Arman.
Arman last week pushed back his rate-cut call to October from this month previously. He estimates that BI will deliver 125 basis points of rate cuts through 2025 compared to 225 basis points by the Fed.
Here’s what to watch out for in the decision around 2:30 p.m. in Jakarta:
Dovish Tone
Governor Warjiyo and his board will probably adopt a more dovish tone on Wednesday and set the stage for a monetary pivot in October, according to analysts. Timing is key as they may want to better gauge the readings coming out of the Fed meeting Thursday, and avoid spoiling the rupiah’s near-7% rally so far this quarter.
Policymakers will take a look at the Fed’s latest assessment of the US economy and could even hold longer to wait “for the dust to settle from the US elections,” Barclays Plc economist Brian Tan wrote in a recent note, adding that a BI-Rate cut may come even later in November.
Whether the US central bank will aggressively lower rates or adopt a more gradual approach would affect foreign fund flows to emerging markets. BI will likely let the Fed make the first move to keep the spread of Indonesia’s assets attractive relative to US Treasury yields, according to Rully Arya Wisnubroto, chief economist at PT Mirae Asset Sekuritas Indonesia.
The caution comes amid an expected slowdown in overseas inflows as the Indonesian government typically reduces debt sales in the fourth quarter. Investors may also unwind their holdings of BI’s rupiah notes, known as SRBI, as yields continue to drop. About $15.4 billion worth of SRBIs are set to mature next quarter, said Wisnubroto.
Leadership Transition
Indonesia’s rate-setting meeting on Oct. 16 will come days before President-elect Prabowo Subianto officially starts his five-year term. A more accommodative monetary stance would help Prabowo achieve his goal of ramping up growth in Southeast Asia’s largest economy to as high as 8% annually.
There are increasing signs that Indonesia’s economic expansion could slow further in the third quarter as the main driver of domestic demand loses steam, according Bloomberg economist Tamara Mast Henderson. Consumer sentiment and hiring intentions have slipped, while lending and manufacturing are also losing momentum, said Henderson, who expects a rate cut on Wednesday.
Still, global risks could outweigh domestic concerns. The unsynchronized direction of global monetary policy may strengthen demand for the dollar and put renewed pressure on emerging-market currencies, including the rupiah, Wisnubroto said.
“We believe it would be easier for BI to justify cutting more later after a gradual, cautious start – versus possibly being forced to hike later after cutting too much in the initial phase of the Fed pivot,” Barclays’ Tan said.
--With assistance from Shinjini Datta.
©2024 Bloomberg L.P.
