BI Preview: Forecasts from six major banks, rate lift-off to come

Bank Indonesia (BI) will hold its monthly governor board meeting on 23-24 May. Here you can find the expectations as forecast by the economists and researchers of six major banks regarding the upcoming central bank's decision. 

The BI is expected to hold its benchmark seven-day reverse repurchase rate unchanged at 3.50%. Meanwhile, BI does not provide any rate guidance and is not expected to do so in the near future.

ANZ 

“BI’s upcoming rate decision is a close call, and we are in the minority calling for a 25bp hike. Our baseline scenario is for 175bps worth of hikes in the current cycle, with at least 100bps coming in 2022.”

TDS

“We expect BI to hike by 25bps in its 7-day reverse-repo rate. We think BI is uncomfortable with the recent spike in USD/IDR, a 2.7% move over a span of 4 weeks. Given its focus on FX stability, we think the rapid weakening of IDR against the USD, albeit partially attributed to the recent strength of the USD, could warrant a response from BI. The Bank is also likely mindful of the policy moves by key central banks (e.g., Fed) and other central banks in the region (e.g., RBI, BNM) as they embark on a quicker normalisation of policy settings to tackle inflation. Further, a stark monetary policy divergence between the Fed and BI could lead to greater capital outflows and place more pressure on the IDR. Coupled with a worsening inflation outlook, we think BI will kickstart the hiking cycle with a pre-emptive hike this month.”

Standard Chartered

“We expect BI to keep the 7-day reverse repo rate unchanged at 3.5% to support IDR stability. Still-modest core inflation (2.6% y/y in April) and an ample trade surplus should provide space to keep the policy rate steady for now. However, we acknowledge that weakening risk sentiment due to a hawkish Fed, persistently high commodity prices, and weakening growth momentum in China may increase the risk of BI making a pre-emptive move, following in the footsteps of other Asian central banks. Overall, we think BI’s policy statement will turn notably more hawkish, especially as the government is close to finalising its subsidy policy, which should provide more clarity on the inflation outlook. We continue to expect BI to hike in Q3 and see possible further RRR hikes as BI responds to higher inflationary pressure.”

ING

“BI will likely keep rates unchanged although expect BI Governor Perry Warjiyo to whip out a ‘hawkish pause’. A blowout trade surplus recorded in April gave BI some breathing room but the central bank may need to consider tightening in the near term. Expect BI to keep rates unchanged while setting the table for a rate hike at the June meeting.”

SocGen

“We expect BI to keep the policy rate at 3.5% at its May meeting but to embark on a tightening cycle from June when inflation will likely be within touching distance of BI’s upper tolerance level of 4.0% after having hit 3.5% YoY in April, a 52-month high.  We now bring forward our BI rate hike expectation from 3Q22 to 2Q22 and expect a 25bp hike in the 7-day reverse repo rate during the June meeting. Also, with average headline CPI growth likely to print at 4.6% YoY for 2H22, we expect two more rate hikes (50bp in 3Q22 and 25bp in 4Q22), taking the cumulative hike in 2022 to 100bp versus our earlier expectation of 50bp. We believe that if BI were to remain on hold in the upcoming meeting and deliver dovish forward guidance, the risk of IDR depreciation vs the USD could be exacerbated.”

BBH

“BI is expected to keep rates steady at 3.50%. However, nearly a third of the 20 analysts polled by Bloomberg look for a 25 bp hike to start the tightening cycle.  Headline inflation accelerated to 3.47% YoY in April, the highest since December 2017 and in the top half of the 2-4% target range. If there is no liftoff this week, then we think it is very likely at the next meeting on June 23.”