Bank Indonesia Leaves Benchmark Interest Rate Unchanged; Hawkish Fed Puts Pressure on Rupiah
In line with expectations, the central bank of Indonesia (Bank Indonesia) kept its benchmark interest rate (BI 7-Day Reverse Repo Rate) at 5.75 percent after the two-day policy meeting on 15-16 February 2023. It also kept its deposit facility and the lending facility at 5.00 percent and 6.50 percent, respectively.
According to Bank Indonesia this level will guide inflation lower (targeting to have both core and headline inflation back within the central bank’s 2.0–4.0 percent year-on-year target range later this year), while allowing the Indonesian rupiah to move back to its fundamental value.
While Indonesian inflation is not a major concern at this moment (we discuss this topic in this edition’s article on inflation), the rupiah did start weakening again in February 2023. This is in stark contrast to what we projected last month. Based on easing inflation in the United States (and based on statements made by US Federal Reserve officials as well as reports in US media), we expected the Federal Reserve to become dovish, meaning that the end of aggressive US monetary tightening was in sight. So, in January 2023, markets seemed to expect one more 25 basis point (or bps) Fed rate hike (in March 2023) before it could focus on cutting rates later this year. Well, this outlook certainly changed in February 2023 (and it impacted on the value of the Indonesian rupiah).
It is now being speculated whether the Fed may raise its interest rates to nearly six percent as strong US consumer demand and a tight labor market forces the central bank to battle inflation for a longer period. So, there could be three more rate hikes on the agenda in the USA: quarter basis-point hikes in March, May, and June 2023. This would then also mean that the US economy risks falling into a (mild) recession later this year.
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