Indonesia’s central bank has room to lower interest rates this year to lift economic growth, but is waiting for the rupiah to strengthen against the dollar, Governor Perry Warjiyo said on Saturday.
“If we rush while the global condition is in disequilibrium, the rupiah could weaken and inflation goes out of control,” he told a media gathering. He said global economic fragmentation caused the disequilibrium.
Bank Indonesia (BI) raised its key policy rate by 250 basis points from August 2022 to October 2023 to 6% to ensure rupiah stability and keep inflation under control.
Warjiyo has repeatedly said Indonesia has room to loosen monetary policy, likely in the second half of this year, as global uncertainty has begun to ease and the Federal Reserve is also expected to trim US interest rates by then. Meanwhile, inflation in Southeast Asia’s largest economy in January eased further to 2.57%, close to the midpoint of the central bank’s target range this year of 1.5% to 3.5%. The rupiah has recently been volatile amid developments in domestic politics ahead of Feb 14 legislative and presidential election and changes in global sentiment for risky assets as investors predict the Fed’s next move.
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Monetary easing in Southeast Asia’s largest economy would help bolster growth while the economy is in an upward cycle of growth, the governor said, adding he expected to the cycle to peak in 2026.
However, the magnitude and length of BI’s easing cycle would depend on how fast Indonesia’s economic growth turned out to be, particularly with an expected transition of power in the government, Warjiyo said.
BI expects the economy to grow between 4.7% and 5.5% this year, compared with last year’s 4.5%-5.3% outlook.
Asked whether BI would trim banks’ reserve requirement ratio (RRR) ahead of any rate cut, which it had done during some of its past easing cycles, Warjiyo said the current liquidity condition is already loose, signalling he preferred to keep RRR rates unchanged.
Published in The Express Tribune, February 4th, 2024.
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