REPUBLIKA.CO.ID, BENGALURU — Central Bank of Indonesia (BI) is expected to maintain interest rates at its monthly board of governors (DG) meeting on February 20-21, 2024. Based on a Reuters poll of economists, interest rates will be maintained due to controlled inflation and an improving currency outlook.

Indonesia's inflation rate has remained within the central bank's target range of 1.5-3.5 percent since July 2023, indicating a cumulative rate increase of 250 basis points. Meanwhile for the rupiah, despite weakening 1.4 per cent against the US dollar this year, it performed better than other currencies.

With inflation under control, BI has room to leave its policies unchanged in the near future. A total of 30 economists in a Reuters poll on February 12-16 expected BI to maintain a BI rate of six percent.

That is in line with the US Federal Reserve's expectation to cut the fed fund rate (FFR) by 75 bps this year. “Our forecast is for the first rate cut that BI made at the June 2024 meeting after the Fed announced its first rate cut in May,” Societe Generale economist Kunal Kundu was quoted as saying by Reuters on Monday (19/2/2024).

Kundu said BI policy is mainly influenced by the actions of the Fed. Given their high reliance on foreign holdings of government bonds, monetary policy continues to be guided by currency movements and bond yields and not necessarily inflation unless it rises too high, too fast.

A majority of economists, 17 out of 29 economists, expect at least one rate cut in the next quarter. Meanwhile 14 economists expect the benchmark rate at 5.75 percent and three economists at 5.50 percent and the remaining 12 see it remaining six percent.

“The risk mostly comes from the external side, which is that U.S. inflation may remain higher than expected, which will lead to a delayed rate cut,” said Elbert Timothy Lasiman, economist at the Central Asian Bank who expects no rate change.

Economists see the impact of the presidential election in Indonesia as limited. Unofficial vote tallies suggest that Prabowo Subianto is most likely to be the winner who fulfils his promise to follow the policies of incumbent Joko Widodo.

Official results will be announced no later than March 20, 2024. “Since current economic policies are likely to continue under Prabowo's administration, their impact on monetary policy and fiscal policy will be limited,” said Jeemin Bang, associate economist at Moody's Analytics.

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