Indonesia: BI to hold, but not for long – Societe Generale

Analysts at Societe Generale offer a sneak peek at what they expect from Bank Indonesia, on the policy front, for 2022.

Key quotes

“Indonesia’s December headline inflation touched an 18-month high of 1.9% and we expect it to inch up from here and move toward its median target of 3.0% in 2022.”

“BI’s monetary policy action is majorly influenced by the triumvirate of dollar exchange rate, bond yield and foreign ownership – not surprising for a country used to a high foreign ownership of government bonds to finance the deficit.”

“However, since the pandemic and amid a substantial drop in foreign ownership of bonds (outflows of $10.6bn since early 2020), BI embarked on a debt monetisation scheme as public expenditure soared. From BI’s perspective, while the currency’s stability may be comforting, this is mainly the result of high commodity prices and weak economic activity. “

“We expect BI to keep the policy rate unchanged at 3.5% in January.”

“However, we believe that the central bank would need to follow the Fed to maintain the attractiveness of real yields as support from foreign bond holders is likely to become crucial once BI starts normalizing its balance sheet.”

“We bring forward our rate hike expectation from 3Q22 to 2Q22 and now expect two rate hikes of 25bp each in 2022 rather than one.”