Bank Indonesia hikes key policy rate by 25 bps, likely to hike again in June

Bank Indonesia hiked its key policy rate by 25 basis points today, as was widely anticipated, in an off-cycle meeting. The newly appointed Bank Indonesia Governor Pak Perry pledged to be “ahead of the curve” in stabilizing the exchange rate. The central bank highlighted that it would continue with its dual intervention in the FX and bond markets.

Promising to hold intensive communications with stakeholders, BI showed its willingness to use the room for further hikes. According to an ANZ research report, the Indonesian central bank might hike the interest rate by further 25 basis points during the June meeting.

“We stand by our view that such an aggressive hiking cycle would dampen growth. Our estimates suggest that a cumulative 100 bps increase in the policy rate will shave off 0.2-0.4ppt of GDP growth over a 12 month period. We will review our GDP growth forecasts of 5.3 percent in 2018 and 5.4 percent in 2019”, stated ANZ.

Bank Indonesia is preparing to introduce “macro prudential relaxation” measures to counter the negative effect on growth. The Indonesian central bank also implied that bank lending rates would not necessarily rise in tandem with the policy rate.

“We however, see intensifying risks that the 2018 credit growth target set at 10-12 percent will not be met, unless these macro prudential measures are sufficient to compensate for higher funding costs”, added ANZ.

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