Bank Indonesia hikes policy repo rate by 25 bps, may hike again in June and September

Indonesian central bank, Bank Indonesia raised its 7 day policy repo rate by 25 basis points to 4.50 percent today, shifting policy focus to guaranteeing exchange rate stability. The rise comes when inflation has been firmly nestled in the central bank's target band of 2.5-4.5 percent and GDP growth has lingered in a narrow range of 5-5.5 percent, noted ANZ in a research report.

Bank Indonesia kept its economic forecasts as such. BI continues to project that the Indonesian economy will grow in the 5.1 percent to 5.5 percent range. Headline inflation is likely to be within its target band of 2.5 percent to 4.5 percent and the current account deficit at 2 percent to 2.5 percent of GDP, respectively. The projection for bank lending growth was also kept at 10 percent to 12 percent even though it was lower at 8.5 percent year-on-year in March.

The central bank acknowledged that the rate hike might affect its GDP growth forecast but the IDR stability was significant for containing inflation. It emphasized that the rate hike was part of a wider policy mix to guarantee IDR stability. It also plans to implement macro-prudential measures which might be affirmed, if required.

“We are of the view that absent renewed weakness in the USD, a single rate hike is unlikely to stabilize the IDR. Accordingly, we are now penciling in two further hikes of 25bps each in June and September, respectively”, stated ANZ.

BI also stated that it is prepared to adjust the policy rate further, if required.

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