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Bank Indonesia's first rate cut pushed to Q3, smaller cuts this year as rupiah falls - Reuters poll

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FILE PHOTO: Bank Indonesia's logo is seen at Bank Indonesia headquarters in Jakarta, Indonesia, January 17, 2019. REUTERS/Willy Kurniawan/File photo - 


VOInews, BENGALURU : Bank Indonesia will cut its key interest rate next quarter and again in the fourth quarter, later than previously expected, as inflation rises and the rupiah weakens on renewed hawkishness from the U.S. Federal Reserve, a Reuters poll found. 

A major hurdle for the central bank, whose main mandate is currency stability, will be cutting rates too soon as the rupiah hit a four-year low on Wednesday after comments from U.S. Federal Reserve officials boosted the dollar.

Inflation touched a seven-month high last month and moved closer to the upper limit of Bank Indonesia's (BI) 1.5 per cent-3.5 per cent inflation target range, suggesting policy rates would need to remain higher for longer.

Over 80 per cent, or 29 of 35, of the economists in the April 16-22 poll expected the central bank to hold its benchmark seven-day reverse repurchase rate at 6.00 per cent at its April 23-24 meeting. Six expected a quarter-point hike.

"We recently pushed back our first rate cut forecast ... given the movement of the rupiah on the back of fewer rate cuts expectation from the Fed by the market," said Makoto Tsuchiya, an economist at Oxford Economics.

"If the central bank were to deter further currency weakness, a 25 bps (basis points) hike is unlikely to do much ... BI will defend its currency by forex market intervention if necessary."

Median forecasts showed the first quarter-point cut coming next quarter, compared to expectations for a cut in the second quarter in a poll in March, followed by another reduction to 5.50 per cent by the end of December, versus 5.25 per cent seen previously.

That was in line with expectations around the Fed as a recent poll showed the first U.S. rate cut has likely been pushed to September.

Among those who provided interest rate forecasts for the third quarter with nearly two-thirds, 21 of 32 economists expect them to be 5.75 per cent or lower. But seven saw rates at 6.00 per cent and four at 6.25 per cent.

"We think the likelihood of a rate hike has risen ... BI is more likely to stay patient and proceed with care, not chasing the initial Fed cut," said Brian Tan, an economist at Barclays.

Only Barclays expected interest rates to be at 6.25 per cent by the end of the year.

There was a clear hawkish shift among economists as over half of the contributors, 15 of 26, raised their fourth quarter forecasts from a March poll. While 10 kept them unchanged, one lowered their rate expectation.

"For Indonesia, the prime driver of monetary policy action is Fed action, not necessarily inflation unless it goes way beyond target," said Kunal Kundu, an economist at Societe Generale.

"Headline inflation remaining above its (BI's) median target of 2.5 per cent suggests that the trajectory of ... rate-easing cycle could be shallow."

While inflation was expected to average 2.9 per cent this year and 3.0 per cent in 2025, economic growth was seen steady at 5.0 per cent in 2024 from 5.05 per cent in 2023 and is forecast to be 5.1 per cent next year.

(For other stories from the Reuters global economic poll)//VOI

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