By Tushar Goenka

BENGALURU, Reuters – Bank Indonesia will keep interest rates stable on Thursday. Inflation remains low for the moment according to economists polled by Reuters. They also expect a rise in bank lending rates to be made at least once in 2022’s third quarter.

In November, Indonesia’s central banks announced that they would maintain low interest rates until inflation rises. Inflation is at 1.75%, which was the highest level since June 2020. However, it’s still lower than the 2-4% range.

The Dec. 6-10 poll of 21 economists showed that no changes were expected to BI’s 7-day reverse repurchase rates, which are currently at 3.50% at the Dec. 16 meeting.

Medians indicated that BI would increase the 7-day reverse repurchase interest by 25 basis points during the third quarter 2022, and once again over the final three months of 2019. This will bring the benchmark rate up to 4.00% at the end of 2022.

The poll last month predicted that the first rate increase would occur in Q4 next year.

“Thankfully for BI,” said Kunal Kundu, economist at Societe Generale, in a client letter. He stated that BI has experienced extremely benign inflation, which should make it accommodative through at most the first half next year.

A separate Reuters poll https://www.reuters.com/world/asia-pacific/bank-indonesia-hold-rates-until-late-2022-awaiting-economic-resurgence-2021-10-15 predicted inflation in Southeast Asia’s biggest economy to pick up, but stay below the central bank’s upper limit at least until mid-2023.

The expected timing of BI’s first move aligns with that for the U.S. Federal Reserve, which according to another Reuters survey is forecast https://www.reuters.com/article/usa-economy-poll/fed-to-lift-rates-in-q3-next-year-but-risk-it-comes-sooner-reuters-poll-idUSKBN2IO0R6 to begin hiking rates in Q3 next year.

According to analysts, the U.S. central banking has indicated that it would be willing to speed up its bond purchasing programme. Analysts fear this could further expose the Indonesian Rupiah (which is already down by 2% against USD for the year) to weakness.

Enrico Tanuwidjaja from UOB, an economist, stated, “The rupiah is gradually going down…the implications of faster rate increases (from the Fed), will lead to Asian currencies, including rupiah being a hostage for volatility.”

“The economy is in twin deficits. This makes the rupiah less sensitive to capital flows.”

BI has pumped in more than 860 trillion rupiah ($59.85 million) to the financial system over the last year. Rates have been lowered by a total amount of 150 basis points, which helps reduce the negative impact of COVID-19.

($1 = 14,370.0000 rupiah)