Research Briefing | Jun 15, 2023

Bank Indonesia to deliver first rate cut in Q4 2023

Bank Indonesia to deliver first rate cut in Q4 2023

We now expect Bank Indonesia to start cutting the policy rate in Q4 2023, earlier than our previous expectation of Q1 2024. There is still economic slack and high public debt, and a more stable currency and lower inflation look set to encourage an earlier rate cut.

We think the declining growth momentum for the rest of this year justifies the rate cut. We estimate the output gap is negative, and the unemployment rate edged higher in Q1, signalling weakness in the labour market.

What you will learn:

  • Moreover, we believe Indonesia’s real interest rate is one of the highest in the Asia Pacific region. As concerns about growth rise, high real rates are not desirable. Even if the central bank wants to keep its monetary stance unchanged by keeping the real rate broadly stable, it will have to lower the nominal policy rate to do so in the declining inflation environment.
  • Despite some recent weakness, the rupiah is much stronger than it was late last year and is currently trading below IDR15,000/USD compared to the lowest point of IDR15,740/USD last year. We expect the US Fed has reached the peak in its tightening cycle and the interest rate differential will stabilize, while a current account surplus will support the currency.
  • CPI inflation has declined rapidly in the last few months to 4% in May from 5.5% in February. Core CPI is already below the mid-point target. We expect the downward trend to continue amid lower commodity prices, a stronger currency, and favourable base effects.
Back to Resource Hub

Related posts

Indonesia's independence day

Post

A capital is born: The impact of Indonesia moving its capital city

Indonesia is planning to move its capital to Nusantara. However, this move is not expected to fully replace Jakarta's economic role as or solve all its problems.

Find Out More

Post

How Asia’s supply chains are changing | Techonomics Talks

Global supply chains have continued to expand, despite talk of deglobalization and nearshoring. US and Japan have started to de-couple from China, but other G7 countries grow more dependent on Chinese inputs. Several "hotspots" are emerging across Asia with multiple winning formulas.

Find Out More

Post

Indonesia rate cuts will bolster credit demand, with pockets of risks

We forecast Bank Indonesia will start cutting its policy rate in Q2, which will provide a cyclical tailwind for credit growth and consequently domestic demand, as lower real lending rates will help boost loan demand.

Find Out More