(Bloomberg) -- Bank Indonesia is likely to pursue slower and fewer cuts to its benchmark interest rate as global uncertainties put rupiah stability at risk, according to economists.
Most analysts expect Indonesia’s central bank to take a longer pause as geopolitical tensions and the prospect of higher US tariffs risk delaying the Federal Reserve’s monetary easing and spur investor demand for safe-haven assets like the dollar.
While some still pencil in a cut at the December meeting, given Indonesia’s slowing economic growth and inflation, most see the bank waiting until next year before it looks to reduce the key rate again. Bloomberg Economics isn’t ruling out the chance that BI could do an about-face and hike borrowing costs in the next 12 months if financial volatility worsens.
BI Governor Perry Warjiyo expressed caution on Wednesday, when the central bank kept the key rate unchanged at 6% and said the room for cuts had narrowed. He repeatedly cited rapidly changing external developments as a deciding factor in charting BI’s easing path, and scrapped the words “in the near-term” when he reiterated that the focus of monetary policy would be on currency stability, and not growth.
The rupiah dropped 0.5% on Thursday, poised to close at the lowest level since Aug. 12, even as most Asian currencies gained versus the dollar. The currency has fallen 1.5% this month.
The governor’s latest statement “signals a slower and shallower monetary policy easing cycle,” Goldman Sachs Group Inc. analysts Rina Jio and Jonathan Sequeira wrote in a note.
“We currently expect BI to cut policy rates another 50 basis points by 1Q 2025 as ongoing Fed rate cuts create some room to ease by widening rate differentials,” they wrote, adding that continued rupiah weakness poses a risk to the forecast.
Here’s what economists are saying:
Krystal Tan, Australia & New Zealand Banking Group
- Our standing forecast of BI policy rate of 5.25% by 1Q now looks too aggressive, with a slower-than-anticipated pace of easing looking likely
- We see 5.25%-5.5% as a reasonable range for BI’s terminal policy rate in 2025
Kunal Kundu, Societe Generale SA
- Currency stability will remain the prime driver of monetary policy decisions even if GDP struggles to grow beyond 5%
- BI may believe that the depreciation pressure on the currency is no longer short-term and multiple factors may sustain the stress
David Sumual, PT Bank Central Asia Tbk
- Governor Warjiyo’s statements reflect that BI’s stance has turned hawkish
- The policy rate will likely be unchanged throughout the year, with BI opting to use macroprudential measures to increase liquidity and support economic growth
Brian Tan, Barclays Plc
- Baseline forecast is for BI to cut its policy rate by 25 basis points in 1Q and 2Q to reach a terminal rate of 5.5%
- If the dollar were to remain stubbornly strong, we would not be surprised if BI is stopped out altogether of its easing cycle
- BI might boost its SRBI auctions as investors are likely to demand higher premiums
Tamara Mast Henderson, Bloomberg Economics
- We don’t rule out a hike in the next 12 months if dollar strength starts to sap liquidity or geopolitical developments stoke risk aversion
- We no longer expect BI to cut rates in December. Markets are likely to be more volatile in the first half of next year as President-elect Donald Trump takes office, making BI unlikely to lower rates further in that period
Reny Eka Putri and others, PT Bank Mandiri
- The central bank still has room to cut the BI Rate by 25 basis points to 5.75% next month
- The Fed Funds Rate might also be lowered by a quarter-point to 4.5% if US economic data softens
- We estimate that the rupiah could reach a range of 15,400–15,700 a dollar by end-2024
Lloyd Chan, MUFG Bank Ltd
- We still look for BI to cut the policy rate again by 25 basis points to 5.75% in December.
- This is largely predicated on our anticipation for the Fed to lower its policy rate by another 25 basis points next month, the USD/IDR to stabilize at around 15,900, and no oil supply shock from ongoing geopolitical tensions in the Middle East
Enrico Tanuwidjaja, PT Bank UOB Indonesia
- BI’s latest move is a pause rather than an end of its rate-cutting cycle
- The start of the easing cycle in September signaled its shift of focus from anchoring financial stability into supporting economic growth
- Our view remains for BI to continue easing, possibly in December with a 25-basis point move and a cumulative 100 basis points of cuts in 2025 to reach 4.75%
--With assistance from Norman Harsono.
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