Bank Indonesia To Hold Rates In July, Calls For A Hike Grow Louder

Bank Indonesia is likely to hold rates at a record low on Thursday, but one in three economists polled by Reuters expected a 25 basis-point hike to shore up the rupiah currency and guard against capital outflows stemming from aggressive U.S. rate hikes.

Faced with relatively low inflation, Bank Indonesia will wait at least one more month before it joins other central banks in raising interest rates, the latest poll found, an unchanged view from a June poll.

Last week, the Philippines and Singapore central banks surprised markets with out-of-cycle monetary policy tightening while Canada delivered a hefty 100 basis-point rate hike.

Although Indonesia's inflation rose to a five-year high of 4.35% in June, BI remains one of the few Asian central banks not to have lifted rates from a pandemic-induced record low.

In a July 11-18 poll, 18 of 29 economists, or around 60%, said the central bank would keep its benchmark seven-day reverse repurchase rate at 3.50% on July 21. Eleven expected a 25 basis-point hike.

"Bank Indonesia is expected to leave the benchmark rate on hold this week, citing manageable core inflation numbers and strong trade surpluses providing support to the rupiah," noted Radhika Rao, senior economist at DBS.

Core inflation, which BI said it would focus on more instead of the headline figure, is at 2.63%, well within the 2%-4% range. But a few economists expect it to inch closer to 4.0% soon.

"Pressure to raise rates is nonetheless building as aggressive Fed rate hikes spur the dollar index sharply higher," said Rao, who expects the first rate hike in either August or September.

A majority of economists agreed there was more tightening coming and saw rates reaching 4.00% by the end of September. Fifteen of 20 respondents who had a view until the end of the year saw rates hitting 4.25% or higher.

Among the smaller sample of respondents who had forecasts to the end of next year, six of nine saw rates at 5.00% or higher - back where they were before the pandemic.

The poll showed inflation was expected to average 3.9% this year and slip to 3.5% in 2023, an upgrade from 3.4% and 3.2% predicted in April.

The rupiah currency, meanwhile, has lost around 5% so far this year but has fared much better than nearly all of its peers. Some are concerned that trend may not hold. [EUR/POLL]

"Bank Indonesia's upcoming rate decision is a close call, but we think recent external developments have tilted the odds toward BI finally pulling the trigger," noted Krystal Tan, an economist at ANZ, who expects a 25 basis-point hike.

"Bucking the hawkish trend could risk BI being perceived as a laggard and intensify pressure on the IDR."

(For other stories from the Reuters global long-term economic outlook polls package:)