Bank Indonesia likely to hike policy rate by 75 bps in remainder of 2018

The stability of the Indonesian rupiah is contingent upon an adjustment in the real economy, according to an ANZ research report. The Indonesian policymakers have adopted the classic approach of expenditure compression and switching to this end. It includes monetary and fiscal tightening and hiking import duties.

Meanwhile, subsidization of domestic fuel prices and restricted monetary policy transmission through lending and deposit rates are decelerating the adjustment of higher interest rates on the Indonesian economy.

“We now expect Bank Indonesia (BI) to raise its policy rate by 75bps in the remainder of 2018 and a further 25bps in 2019. We do believe that these steps will over time stabilise the Rupiah but at the cost of slower growth and potentially higher inflation as fuel prices are adjusted after the Presidential elections”, stated ANZ.