Bank Indonesia leaves rates unchanged in July

BI shocks with a hold: At its meeting on 21–22 July, Bank Indonesia (BI) decided to maintain the BI-Rate at 5.75%, surprising market analysts who had priced in a hike.

Rupiah weakness continues to drive monetary policy: While the rupiah’s stability remained BI’s main policy focus and dissuaded authorities from a cut, the Bank opted against a hike to prevent spikes in domestic rates that would have pressured the economy. Instead, BI opted to support the currency and foreign investment inflows through other measures, including lower costs for FX hedging transactions and incentivizing the use of other foreign currencies besides the USD.

Rate hikes likely ahead, but change in BI leadership could presage a shift in strategy: Most of our panelists see BI hiking rates by at least 25 basis points by December amid persistent rupiah weakness and rising inflation, with potential U.S. Fed hikes posing an upside risk. However, Governor Perry Warjiyo unexpectedly resigned in late July, a move that some panelists deem could turn BI’s stance more dovish by year-end. BI is scheduled to reconvene on 18–19 August.

Panelist insight: Nomura’s Euben Paracuelles and Nabila Amani commented: “We continue to forecast 50bp of policy rate hikes by BI in Q4, as balance of payment (BOP) pressures persist, and as we believe the incentives introduced to attract inflows are unlikely to be as large as BI projects. Also, we would view the appointment of a new BI governor as potentially leading to a more dovish and more ‘pro-growth’ BI stance, which would risk undermining BI’s objective of maintaining FX stability and could elicit further concern over BI’s independence. […] We still see significant potential for a rating downgrade in coming months by Moody’s and/or Fitch, which could add to BOP pressures.”

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