Bank Indonesia concludes a two day meeting on Wednesday with its decision genuinely in doubt for the first time in this cycle. A Reuters poll of 29 economists taken between October 13 and 19 found only 15 expecting the seven day reverse repurchase rate to stay at 5.75 percent, where it has sat since June, with the deposit facility at 4.75 percent and the lending facility at 6.50 percent. Since the poll closed, the calls have moved: Citibank, which had expected no change, now projects a pre-emptive 50 basis point increase to 6.25 percent, Capital Economics and Permata Bank expect 25 basis points to 6.00 percent, and OCBC has brought a December hike forecast forward to Wednesday, CNBC reported.
The trigger is not inflation. Headline inflation was 3.28 percent in September and core inflation eased to 2.84 percent, both inside the central bank’s 1.5 to 3.5 percent target band. The trigger is MSCI. The index provider said on Friday it is considering moving Indonesia from emerging market to standalone status, a classification the country has held since 1989, and the Jakarta Composite Index plunged 11.6 percent on Friday, its worst one day drop since January 1998, then fell about 5 percent more in early Monday trading before recovering about 3 percent on Tuesday after authorities announced transparency steps, including expelling tightly held companies from the flagship index. This site’s markets coverage reported the Tuesday rebound separately.
The rupiah is the channel the rate decision can actually reach. It traded at 18,030 per dollar on Tuesday, near its June record low and down about 8 percent this year, having breached 18,000 on Monday. “Not delivering a rate hike on Wednesday would run the risk of disappointing investors and fueling further downward pressure on the currency,” Capital Economics’ Jason Tuvey said, adding that a hold could revive concerns that the bank is kowtowing to political pressure. The central bank has already raised rates by a cumulative 100 basis points since May and has been intervening through swap instruments and domestic non-deliverable forwards that Governor Destry Damayanti said had attracted about 8 to 8.5 billion dollars of inflows.
That leaves Wednesday as a credibility test in both directions. A hike defends the currency but tightens into an equity market that has just had its worst two days on record; a hold keeps faith with the inflation data and bets that index governance reforms, not the policy rate, answer MSCI’s complaint. The poll’s narrow hold majority was assembled before the worst of the rout, which is why the forecast revisions since Monday matter more than the poll itself.