Catching Up with the Fed
Key Takeaways
• BI surprisingly raised the benchmark policy rate by +50 bps to 4.25% on Sep-22 meeting, higher than consensus estimate of +25 bps to 4.00%.
• BI emphasized that interest rate hike is needed reflecting front-loading, pre-emptive & forward looking policy to bring back inflation at a desirable level of 2-4%.
• BI expect headline and core CPI to increase >6% & 4.6% this year due to the increase in subsidized fuel prices.
• BI said that recent IDR depreciation was driven aligned with peers due to strengthening the USD index.
• BI also has other policy mix to promote stability mainly through reserves requirement & policy rate hike as well as operation twist.
• Given the high possibility of Fed to raise their benchmark rate further and in order to safeguard interest rate parity while anchoring as well as maintaining IDR stability, we expect 7-day reverse repo rate to be brought to at least 5% for FY22E.
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