Indonesia Seen on Hold as Price Pressures Brew: Decision Guide

(Bloomberg) -- Indonesia’s central bank is expected to leave its benchmark interest rate unchanged Thursday as it assesses tentative signs of price and currency pressures.

Bank Indonesia will keep the seven-day reverse repurchase rate at 3.75%, according to 28 of 29 economists surveyed by Bloomberg. One expects a 25 basis-point cut.

The rupiah has weakened 1% since Jan. 4, when it reached its highest point in almost seven months, as movement curbs were reimposed to contain the pandemic. Bank Indonesia may wait for the currency to find its footing before easing further, said Nicholas Mapa, economist at ING Groep NV in Manila.

“Sentiment appears to have calmed somewhat over the past trading sessions, but it did remind investors of how quickly sentiment can shift,” Mapa said.

Here’s what to look out for in Thursday’s policy decision:

Inflation Path

In addition to the rupiah, inflation will be on the central bank’s mind. Higher food prices sent inflation climbing to 1.68% in December -- its fastest pace in six months -- though still below policy makers’ 2%-4% goal. Stimulus spending and increased economic activity should push inflation up to 2.92% this year, according to Andry Asmoro, chief economist at PT Bank Mandiri in Jakarta.

While Bank Indonesia will keep its monetary and macroprudential policy mix accommodative, the inflation uptick will limit its room to deliver more interest rate cuts, Asmoro said. He expects the central bank to stay on hold for all of 2021 after it lowered rates by 125 basis points last year.

Uncertain Recovery

Investors will be looking for reassurance that Southeast Asia’s largest economy is on track to rebound this year after record spikes in Covid-19 infections and deaths triggered more-stringent distancing measures in Jakarta and other regions.

The worsening spread comes as Indonesia is fighting to escape its first recession since the Asian financial crisis. Manufacturing, trade and consumer confidence have improved recently, while retail sales are still down.

Mobility data suggest the economy is losing some steam after virus curbs were tightened this month, Barclays Bank Plc regional economist Brian Tan said. The central bank might lower rates by 25 basis points later this quarter when it becomes clear the recovery will fall short of estimates, he said.

Bank Indonesia estimates the economy showed positive growth in the final quarter of 2020, and will expand 4.8%-5.8% this year.

Lean Lending

Credit growth has long been in the sights of Bank Indonesia Governor Perry Warjiyo, who says lenders have been slow to pass on interest-rate cuts to borrowers. Lending shrank 2.4% in 2020 as companies balked at expanding and banks avoided risk.

According to PT Bank Maybank Indonesia chief economist Juniman, who goes by only one name, lending rates have so far fallen only 78 basis points, compared to the 125 basis points Bank Indonesia has cut since February 2020. Warjiyo will likely wait and see whether past rounds of easing are making an impact in the real sector before making another move, Juniman said.