Bank Indonesia Policy Review: Rate Pause As BI Remains Watchful
Bank Indonesia's upcoming monetary policy decisions will hinge on a delicate balance of domestic economic indicators and global financial conditions. With a focus now tilted slightly more towards economic growth than in previous years, BI could surprise markets with its timing and decisions, depending on how these factors evolve. However, for now, we anticipate a rate hold in March.
As Bank Indonesia (BI) approaches its March monetary policy decision, the central bank finds itself balancing competing priorities: fostering economic growth and maintaining currency stability. In February, BI held its key rate steady at 5.75%, a pause following a surprising 25-basis-point cut in January. This decision underscores a strategic pivot, focusing more on stimulating economic activity while keeping a watchful eye on the rupiah's performance amid a shifting global landscape.
In recent months, BI's monetary policy has subtly shifted towards supporting economic growth. This change comes after inflation has remained benign, hovering close to the lower end of BI's target band of 2.5% +/-1%. The January rate cut, while unexpected, was a clear signal that the central bank is willing to leverage monetary policy to prevent a slowdown in economic activity. The latest GDP figures support this cautious optimism, with growth ticking up slightly to 5.02% yr/yr in the fourth quarter of 2024 from 4.94% in the third quarter. Despite this, the annual growth rate of 5.03% in 2024 fell short of the government's 5.1% target.
The rupiah's trajectory has been a key influencer of BI's policy decisions. After depreciating 6.3% against the USD in 2024, the rupiah's stability has been paramount. The central bank has employed tools like foreign exchange intervention and Bank Indonesia Rupiah Securities (SRBI) to manage volatility. This proactive stance was evident when BI chose to cut rates in January despite the rupiah's ongoing depreciation, a move that deviated from its usual practice of tightening to support the currency. Inflation, meanwhile, has not posed significant concerns. January saw CPI inflation drop to 0.76% yr/yr while price growth turned negative in February (-0.1% yr/yr) primarily due to a temporary reduction in electricity tariffs aimed at cushioning the impact of a VAT rate increase. While this dip in inflation is expected to be transient, with rates projected to rebound as temporary cuts expire, BI remains confident that inflation will stay within its target range throughout 2025. Therefore, leaving sufficient headroom for a rate cut.
However, the global economic environment continues to exert significant influence over Indonesia's monetary policy choices. Delays in the Fed's monetary easing, following three rate cuts in the second half of 2024, are likely to impact BI's decision-making. These delays provide BI with some breathing room, easing pressure on the rupiah and potentially delaying further rate cuts. Looking forward, while a rate cut in March seems unlikely, BI might consider reducing rates in April or May, should the rupiah stabilise and economic indicators suggest further easing is prudent. However, the pace of the Fed’s policy adjustments will be crucial. Should the Fed's easing be postponed further, BI may opt to maintain current rates longer to assess the global and domestic economic landscape thoroughly.