Mandiri Sekuritas anticipates that Bank Indonesia will lift its policy rate by 25 basis points to 5.00% at the May 20 policy meeting, driven primarily by ongoing Rupiah weakness and a reduction in foreign exchange reserves.
The research house assigns a 60% probability to this direct policy rate move. It assigns the remaining 40% probability to an alternative course of action in which Bank Indonesia preserves the headline BI Rate but tightens monetary conditions through increases in non-BI Rate instruments - a so-called dual-track approach aimed at defending the currency.
Since the central bank's April meeting, the Indonesian currency has depreciated by more than 2%, according to the figures cited by Mandiri Sekuritas. At the same time, foreign exchange reserves fell to a level covering 5.8 months of imports in April, a point the firm highlights as a factor increasing pressure on policy makers.
Mandiri Sekuritas notes that Bank Indonesia has been raising SRBI and repo rates persistently, which the research team interprets as a hawkish stance even when the headline BI Rate is left unchanged. Those increases in SRBI and repo rates form part of the toolkit the central bank has used to tighten financial conditions.
The research note also points to domestic demand indicators that strengthen the case for tighter policy: loan growth remains inside the central bank's target range, and first-quarter gross domestic product expanded solidly. Taken together, these dynamics reduce the central bank's need to prioritize growth over price and currency stability.
Mandiri Sekuritas summarizes its case for a 25 basis point move with four primary considerations: persistent Rupiah weakness, the depletion of FX reserves, the continued increase in SRBI and repo rates signaling a hawkish bias, and the combination of healthy loan growth with solid economic expansion in the first quarter.
Policy makers thus face a choice between a direct policy rate increase or further use of non-BI Rate instruments. Mandiri Sekuritas' probabilistic view leaves both outcomes on the table ahead of the May 20 decision.
Market implications
- Financial markets - especially FX and fixed income - will be sensitive to whether the BI Rate is raised or whether tightening is achieved through non-BI Rate instruments.
- Banking sector - loan growth and domestic credit conditions are relevant to the central bank's decision framework.
- Broader economy - the decision balances currency stability against supporting continued economic expansion.