POLL-Bank Indonesia to hike key rate next quarter as inflation risk rises

By Devayani Sathyan and Shaloo Shrivastava

BENGALURU, April 14 (Reuters) – Bank Indonesia will raise interest rates next quarter on expectations of a hawkish stance by the U.S. Federal Reserve and higher inflation, according to a Reuters poll which predicted faster-than-expected moves by the central bank this year.

However, Governor Perry Warjiyo on Wednesday reiterated his pledge to keep interest rates unchanged, even as Bank Indonesia (BI) sees a risk of faster monetary tightening in the United States amid high global inflation. nJ9N2UK00A

But Indonesia’s consumer price index (CPI) rose from 2.1% in February to a two-year high of 2.6% in March on high food price inflation. While that was still within BI’s targeted range of 2%-4%, economists say inflation is likely to edge up.

A spike in global energy and food prices due to Russia’s invasion of Ukraine – some of which has already been passed on to high-end fuel – and a pick up in demand during the Ramadan festive period in April and May, were expected to push inflation higher.

“We are of the view that the combination of an increasingly hawkish U.S. Fed and broadening price pressures will make it more difficult for BI to remain as patient as it would have liked,” said Krystal Tan, economist at ANZ.

“March data showed inflation picking up and price pressures broadening, and inflation is set to accelerate further in April given the VAT rate hike and hikes to Pertamax fuel prices.”

While BI was unanimously expected to keep its benchmark seven-day reverse repurchase rate IDCBRR=ECI at a record low 3.50% after the April 18-19 policy meeting, it was predicted to hike rates faster than earlier thought.

The latest Reuters poll taken April 6-13 showed interest rates would rise to 4.00% and 4.25% in the third and fourth quarter, compared to 3.75% and 4.00% expected in a March poll. Five participants even predicted a 25-basis-point rate hike to come as soon as May or June.

“BI might bring forward the start of its rate hike cycle to this quarter if the U.S. Fed’s move to front-load rate hikes in Q2 fuels a further rise in yields and the dollar…depressing regional currencies, especially the rupiah,” said Radhika Rao, senior economist at DBS Bank.

The U.S. federal funds rate is now forecast to end 2022 at 2.00%-2.25%, including two 50-basis-point rises in May and June, another Reuters survey showed. ECILT/US

Inflation predictions for the Indonesian economy rose considerably to 3.3%, 3.8% and 4.1% for the second, third and fourth quarters from 2.8%, 3.3% and 3.0% in a poll taken in January.

“The current circumstances are leading to a 4% headline inflation at year-end, even possibly exceeding the upper target of BI,” said Irman Faiz, a macroeconomic analyst at Bank Danamon.

“If inflation accelerates faster than expected, we see that BI will also hike rates earlier than expected.”

While inflation was expected to average 3.4% and 3.2% in 2022 and 2023, the economy was forecast to expand 5.2% in both years.

(For other stories from the Reuters global long-term economic outlook polls package: nL3N2VY2TT)

(Reporting by Devayani Sathyan and Shaloo Shrivastava; Polling by Swathi Nair and Arsh Tushar Mogre;
Editing by Bernadette Baum)

((Devayani.Sathyan@thomsonreuters.com;))