By Devayani Sathyan

BENGALURU – Bank Indonesia is likely to wait a while to increase rates, despite rising inflation levels and the aggressive actions of the U.S. Federal Reserve. According to a Reuters poll by economists, a small minority expected a rise next month.

While inflation rose to 3.47% during April, which is the highest level in over four years, it still falls within Bank Indonesia’s 2%-4% target range. This suggests that the central bank does not feel under pressure to increase interest rates.

Two out of 27 economists polled in May 12-19 poll predicted Bank Indonesia’s (BI) benchmark seven-day reverse repurchase interest rate to remain at a new record low of 3.50% during its May 24 meeting. Two forecast a 25 basis-point increase.

Eight out of 27 respondents said that the rate increase would occur in June. The remaining 17 responded saying it would happen at the July-September monthly meeting.

Radhika Rao is a senior economist at DBS Bank and said that she expects policymakers to prepare the groundwork for a “hawkish pivot”, taking in rising inflation, a 1Q22 GDP firm, as well as a looser currency to dewind accommodative policy settings.

Regional central banks began to normalize policy sooner than expected to limit inflationary expectations.

Economists believe that BI will continue to maintain its inflation target if it is right.

However, if inflation exceeds target, there is a chance of an earlier move. This has happened in India and Malaysia recently.

Krystal Tan from ANZ economist, stated that “Recent economic, financial market developments support BI’s case to begin its rates liftoff as soon as possible.” She expects a 25-basis point increase at the upcoming meeting.

The economy is now back at pre-pandemic levels, and inflation is picking up speed. These events are encouraging BI to adjust its stance quickly. Even if BI does NOT hike in May, it’s likely to adopt a more hawkish stance.”

In either case, interest rates will likely rise in the future.

26 of the 27 survey respondents said that rates should be higher than 4.00% at year’s end. Sixteen responded with 4.00%; eleven had 4.25%; five gave 4.50%; and two predicted rates as high as 4.75%. The three remaining rates were only expected to reach 3.75% by the year’s end, according to the other three.

Most respondents in a smaller group who forecasted rates for next year saw rates reaching 5.00%. This is back at the level of the COVID-19 pandemic. There were two rates that would reach 5.75%.