Bank Indonesia to keep interest rates unchanged in July

Bank Indonesia is expected to keep interest rates at a record low on Thursday, but one in three economists in a Reuters poll expect a 25 basis point hike to support the rupiah currency and guard against capital outflows from aggressive rate hikes in the United States.

Bank Indonesia, faced with relatively low inflation, will wait at least another month before joining other central banks in raising interest rates, according to the latest survey, unchanged from a June survey. Last week, the central banks of the Philippines and Singapore surprised markets by tightening monetary policy out of cycle, while Canada hiked rates by a hefty 100 basis points. Although inflation in Indonesia rose to a five-year high of 4.35% in June, BI remains one of the few Asian central banks that did not raise rates from the pandemic-induced record low. In a survey conducted between July 11-18, 18 out of 29 economists, or nearly 60%, said the central bank will keep its benchmark seven-day reverse repo rate at 3.50% on July 21. Eleven expected a 25 basis point hike. "Bank Indonesia is expected to leave its benchmark interest rate unchanged this week, citing manageable core inflation numbers and a strong trade surplus as support for the rupiah," said Radhika Rao, senior economist at DBS. Core inflation, which BI said it would focus more on instead of the headline figure, stands at 2.63%, hovering between 2%-4%. But several economists expect it to approach 4.0% soon. "Pressure for a rate hike is still mounting as the Fed's aggressive rate hikes have pushed the dollar index sharply higher," said Rao, who expects the first rate hike in August or September. The majority of economists agree that there will be more tightening and think that rates will reach 4.00% by the end of September. By the end of the year, 15 out of 20 respondents think that interest rates will reach 4.25% or higher.