Indonesia Monetary Policy January 2023

At the monetary policy meeting held on January 18-19, Bank Indonesia (BI) raised the seven-day reverse repo rate by 25 basis points from 5.50% to 5.75%, continuing the tightening cycle, bringing the total rate increase to 225. basis points since August. The size of the rise was expected by market analysts. The bank also raised the deposit facility rate and the lending rate by 25 basis points each, to 5.00% and 6.50%, respectively.

The bank decided to continue tightening “in a proactive, proactive and forward-looking measure” to anchor inflation expectations and bring inflation within the 2.0-4.0% target range. Meanwhile, the bank aims to support the rupee to control imported inflation. The International Investment Bank commented that inflation expectations were moderate, and that it expects core inflation to move within the bank’s target range in the second half of this year. As for economic activity, the bank expects growth to come in the mid-range of 4.5-5.3% this year, supported by strong domestic demand.

Looking ahead, Governor Perry Wargio suggested that the end of the monetary tightening cycle — barring unexpected data — was in the future, calling current hikes “enough” to tame inflation in a statement.

Commenting on the outlook, Nicholas Mapa, Chief Economist at ING, said:

‚ÄúDespite today’s rate hike, we acknowledge the apparent shift in tone for Wargio. BI chose to extend the tightening cycle given that inflation will likely be above target for the first half of 2023. However, BI’s downward revision of the global growth outlook indicates that it “Now is increasingly wary of the negative impact this could have on Indonesia’s growth trajectory. The stark shift in tone suggests that BI is likely nearing the end of this price-raising cycle and that pauses will be considered in the coming months.”

The bank is expected to meet from February 15-16.

The seven-day reserve repo rate is expected to end in 2023 at 5.57% and 2024 at 5.08%.

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