There is no room for price reduction

PADALARANG:

Indonesia’s central bank has room to cut interest rates this year to boost economic growth, but expects the rupiah to strengthen against the dollar, Governor Perry Warjiyo said on Saturday.

“If we rush while the global situation is in disequilibrium, the rupiah may weaken and inflation may spiral out of control,” he told a media gathering. He said global economic fragmentation caused the imbalance.

Bank Indonesia (BI) raised its key interest rate by 250 basis points from August 2022 to October 2023 to 6% to ensure the stability of the rupiah and keep inflation under control.

Warjiyo has repeatedly said Indonesia has room to ease monetary policy, likely in the second half of this year, as global uncertainty has begun to ease and the Federal Reserve is also expected to cut US interest rates by then. Meanwhile, inflation in Southeast Asia’s biggest economy in January eased further to 2.57 percent, near the middle of the central bank’s target range this year of 1.5 percent to 3.5 percent. The rupiah has recently been volatile amid domestic political developments ahead of the February 14 legislative and presidential elections and changes in the global risk-asset sentiment as investors anticipate the Fed’s next move.

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Monetary easing in Southeast Asia’s largest economy would help boost growth while the economy is in an upward growth cycle, the governor said, adding that he expects the cycle to peak in 2026.

However, the size and duration of BI’s easing cycle will depend on how fast Indonesia’s economic growth would be, particularly with an expected government transition, Warjiyo said.

BI expects the economy to grow between 4.7% and 5.5% this year, compared with last year’s outlook of 4.5%-5.3%.

Asked whether BI would cap banks’ reserve requirement ratio (RRR) ahead of any rate cut, which it had done during some of the previous easing cycles, Warjiyo said the current liquidity situation is already loose, signaling his preference to keep RRR rates unchanged.

Published in The Express Tribune, February 4^u2024.

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