Keeping up with the preference for bunched up moves, BI delivered a third successive 50bp hike on Thursday, taking the benchmark rate to 5.25%, matching our expectation. Policy rates have been raised by a cumulative 175bp since Aug22. Besides inflation, spillover risk of global uncertainty on the rupiah was likely an equally important driver behind the move. BI trimmed end-2022 forecast for core inflation to 3.5% from 4.3% held earlier, expecting it to peak at 3.75% in 1Q23 as a tight policy prevents breach of the 2-4% CPI target. Authorities also expect pressure on the currency to ease in 1Q23 just as the US rate peaks at 5%. This was accompanied by remarks that BI was committed to tighten policy whilst pursuing Operation Twist purchases to draw in more foreign funds (see here).
While IDR liquidity remains flush, authorities’ attention has also been on improving onshore FX liquidity (see section here). Low returns has deterred foreign currency liquidity from returning to the domestic markets, despite a strong goods trade surplus year-to-date and record investment flows. The BI signaled that a new financial instrument was in the offing to make it attractive for banks' depositors to channel FX flows back into the country. Deputy Governor Damayanti added that the instrument will carry "guaranteed liquidity, and can be rolled over”, besides earning competitive rates. In the past decade, export earnings were required to be repatriated to domestic banks after which these funds can be rerouted for FX debt or import payments, with these rules tightened in 2019 on commodity exporters (parked in a special banking account). While most have reportedly complied, rising returns in the offshore markets has prompted exporters to park funds outside the country. To address a similar shortage, the BI had issued dollar term deposits (7-day, 14-Day and 1month tenors) in mid-2012, to supplement dollar reserves and backstop intervention efforts, besides providing an additional cushion for the currency.
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