Indonesia’s central bank slowed the pace of its monetary tightening Thursday, in a move seen to support growth as inflationary pressures ease.
(Bloomberg) — Indonesia’s central bank slowed the pace of its monetary tightening Thursday, in a move seen to support growth as inflationary pressures ease.
Bank Indonesia opted to raise the key rate by a quarter-point to 5.5% on Thursday, marking a shift to “more measured” moves after three successive half-point actions to tame inflation. As the outlook for the global economy deteriorates in 2023, Governor Perry Warjiyo wants to ensure ample liquidity to boost spending and borrowing.
“BI will not raise interest rates excessively,” Warjiyo said Thursday. “BI will continue to assess its next interest rate moves, but our hints have been clear: inflation and inflation expectations are declining.”
The central bank expects gross domestic product advancing 4.5%-5.3% this year and the next — enough to turn Indonesia into a $1.3 trillion economy in 2023. That will almost match the size of Mexico, the world’s 15th largest economy that’s expected to experience slower growth during the same period.
Calibrated rate increases will ensure that demand-recovery is not choked, helping the country’s growth to remain on course to beat the rest of the MINT pack, an acronym popularized a decade ago by former Goldman Sachs chief economist Jim O’Neill to describe the developing economies of Mexico, Indonesia, Nigeria and Turkey.
Stronger Rupiah
Southeast Asia’s largest economy has likely moved past the worst of price pressures. The central bank expects headline inflation to decelerate to 5.4% by end-2022 from the seven-year high of 6% in September. Core inflation should stay within the 2%-4% target range through 2023.
“The need for outsized rate increases have eased and rate hike cycle is entering the late stage,” said Winson Phoon, head of fixed income research at Maybank Securities Pte in Singapore, who expects the rate to peak after two more quarter-point increments by the first quarter of next year.
Bank Indonesia also expects the rupiah to strengthen next year as a less hawkish Federal Reserve clears up volatility in global financial markets. The currency has already found steadier footing against the greenback, clawing back a 1% gain so far this month.
All of that has given Warjiyo room to support the economy going into the new year. Indonesia’s political leadership has already driven home the message that growth shouldn’t be sacrificed in the fight against inflation.
Finance Minister Sri Mulyani Indrawati previously warned that excessive monetary policy tightening “can kill the whole recovery of the economy.” That message was reinforced by President Joko Widodo last month when he underlined the need for caution in 2023 as slowing global growth could weigh on Indonesia’s recovery.
–With assistance from Soraya Permatasari, Norman Harsono, Faris Mokhtar, Rieka Rahadiana, Yudith Ho, Tomoko Sato and Chester Yung.
(Updates with details throughout.)
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