By Veronica Dudei Maia Khongwir
BENGALURU (Reuters) - Bank Indonesia (BI) will keep its key interest rate at 6.25% on Wednesday but will cut it by 25 basis points next quarter, earlier than previously expected following the likely start of policy easing by the U.S. Federal Reserve in September, a Reuters poll found.
While inflation has stayed within BI's 1.5%-3.5% target range since July 2023, a weak rupiah - down around 4.5% this year - has pressured the central bank to maintain higher rates for longer as currency stability is its main mandate.
All 35 economists in the July 8-12 poll expected the central bank to hold its benchmark seven-day reverse repurchase rate at 6.25% at the conclusion of its two-day meeting on July 17.
"We expect the BI to keep rates on hold in July. While the disinflationary path is conducive for policy, Bank Indonesia's explicit FX stability mandate, rather than inflation, has been the driver of its rate actions in the past year," wrote Radhika Rao, senior economist at DBS Bank.
"At the last review, BI Governor Perry acknowledged that these risks have troubled the currency but retained his view that USD/IDR will return to sub-16000 as more clarity emerges, which would then pave the way for rate cuts."
BI Governor Perry Warjiyo said last week there could be room for an interest rate cut next quarter as the rupiah is expected to become more stable, but for now, the focus will remain on efforts to maintain currency stability.
Median forecasts showed no change to interest rates this quarter but predicted a 25 basis point drop to 6.00% in the fourth quarter. In a June survey, the consensus view predicted the initial cut in the first quarter of 2025.
Among economists who provided an outlook for the end of 2024, there was no clear consensus on where the policy rate would be.
While 18 forecast rates to be 6.00% or lower, 13 expected it to remain at the current level, with the other one predicting a 25 basis point hike to 6.50%.
"With global uncertainties still heightened and USD/IDR elevated, BI will maintain a cautious stance and continue prioritising currency stability," said Sanjay Mathur, chief economist of Southeast Asia and India at ANZ.
"We remain of the view that a Fed pivot is a prerequisite for BI to consider following suit."
Inflation was expected to average 2.9% and 3.0% this year and next with the economy projected to grow around 5.0% in both years.
(See other stories from the Reuters global economic poll)