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Bank Indonesia will keep rates unchanged in June, but will begin raising them in the third quarter

Image: Reuters Berita 24 English -  On Thursday, Bank Indonesia will hold its key interest rate at 3.50 percent, although more than a quart...

Image: Reuters

Berita 24 English -  On Thursday, Bank Indonesia will hold its key interest rate at 3.50 percent, although more than a quarter of economists polled by Reuters expect a rate hike to combat imported inflation caused by a weak rupiah currency as the US Federal Reserve tightens quickly.

Since inflation has remained within its goal range of 2% to 4%, Indonesia's central bank is one of the few major Asian central banks that has not hiked rates from a historic low.

However, the rupiah fell 2% last week, its worst weekly performance
in nearly three years, following a 75-basis-point Fed rate hike last week and the threat of further strong movements in the coming months.

Despite this, 23 of 32 analysts polled between June 13 and June 20 expected the central bank will hold its benchmark seven-day reverse repurchase rate at a record low of 3.50 percent at its meeting on June 22-23.

"Bank Indonesia's policy dashboard is expected to expand from domestic growth and inflation to include financial stability and outflow risks, opening the door for a hike cycle to begin in July," said Radhika Rao, senior economist at DBS Bank.

Nonetheless, a sizable minority of respondents (9 of 32) believe BI will follow other Asian counterparts and raise rates by 25 basis points to 3.75 percent.

"Unless the current pressure on the IDR eases in the lead-up to BI's meeting, a rate hike, or at least unambiguous signs that a rate lift-off is near, the most prudent decision is a rate hike," said Krystal Tan, an economist at ANZ, who predicts a 25 basis point increase.

"In the absence of a shift in approach, BI could be seen as the lone regional laggard, increasing pressure on the IDR."

In a country with a population of over 270 million people, the currency of Southeast Asia's largest economy has declined about 4% this year, half of that in the previous week, sparking concerns about imported inflation.

Price pressures had been pretty low until lately. However, rising global oil and food costs have pushed inflation near to the BI's goal range, with 3.55 percent in May being the highest in more than four years.

At the May policy meeting, Governor Perry Warjiyo admitted that inflation will increase above the target band this year, but forecasted that it will fall next year.

"Other factors such as increased food price inflation and the pass-through from increasing input costs and higher minimum salaries are likely to keep the upward trajectory," said Nomura economists, who predict inflation to rise beyond 4% by the end of Q3.

According to poll medians, BI, which meets monthly, will begin its rate hike cycle next quarter, raising rates by a total of 50 basis points to 4.00 percent by the end of the third quarter.

Seventeen economists projected a 25-basis-point increase in BI in Q3, eight predicted a 50-basis-point increase, and two predicted a 75-basis-point increase.

However, according to the poll, BI will not be aggressive throughout this round. Its benchmark rate was forecast to rise 75 basis points to 4.25 percent by the end of the year, and to 5.00 percent by 2023.

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