Bank Indonesia raises interest rate to 6.25 pct; likely last hike of 2024
Bank Indonesia’s (BI) benchmark interest rate hike to 6.25 per cent on Wednesday is likely to be the bank’s first and last rate hike for 2024, according to RHB Investment Bank (RHB IB).
It expects BI to keep its rates unchanged as inflation remains tame with headline prices within the 1.5-3.5 per cent target for this year, while higher rates may depress loans growth and consumer demand.
In fact, it said, a weaker rupiah may help support trade surplus, especially with trade surplus seeing a 40 per cent year-on-year decline in the first quarter of 2024.
“We recognise tail-end risks for further hikes only if global inflation pressures or geopolitical tensions exacerbate unexpectedly into the second half of the year (2H24),” RHB IB said in a note yesterday.
It noted that initial market reaction has been muted, suggesting that a single 25 basis points rate hike following the central bank’s April meeting may be insufficient to stem rupiah weakness.
In a virtual briefing, BI governor Perry Warjiyo said the rate hike was in response to the US dollar’s resurgence and the conflict in the Middle East, thus requiring an “anticipatory, forward-looking, and preemptive” policy.
At the briefing, Perry predicts the rupiah will stay stable at 16,200 per USD in the second quarter and strengthen to 15,800 per USD by the fourth quarter amid the overall strength of the greenback.
The rupiah had dropped by 2.3 per cent against the US dollar in the past month.
In a separate note, Maybank Investment Bank (Maybank IB) said that BI is contemplating the possibility of raising interest rates in the future, despite the absence of immediate plans for such action.
It emphasised that the central bank’s primary concern revolves around maintaining stability in the rupiah.
“There is a risk that a continued depreciation of USD/IDR at the pace seen in recent weeks may trigger another rate hike,” added Maybank IB.
BI’s move to raise its key policy rate to 6.25 per cent marked the benchmark rate’s highest level since 2016.