In line with market expectations, Bank Indonesia (BI) maintained its policy rate at 3.50% for a third straight month. Since the onset of the pandemic, the BI has lowered interest rates by 150bp and injected close to $55bn in liquidity. In the accompanying press statement, there was little sign that the BI is in any rush to change its monetary policy stance in either direction, with the Governor outlining: “we maintained the benchmark rate at 3.5%, until when?... until we see signs of inflation rising, and the soonest such signs of rising inflation appear could be early next year”. In direct contrast with many central bank contemporaries, who have commenced tightening, the BI has breathing room for the time being; April CPI at 1.42% remains below the 2-4% target for 2021. The monetary policy room is a welcome counterbalance for Indonesia, as the country navigates a fresh wave of infections following Lebaran (Eid) and a sluggish vaccination rollout.

While the MPC minutes for the May 13th meeting were finely balanced, we note a subtle hawkish tilt; most board members have suggested that the growth outlook has improved and inflation pressures, while transitory, are skewed to the upside. Likewise, compared to the April minutes, there are no longer any direct calls to seek a window of opportunity to cut rates. Earlier this month, the five board members voted unanimously to hold rates at 4%, reflecting growing concerns about the path of inflation, which was highlighted in the minutes; “in a highly uncertain environment such as the current one, a prudent approach is required”. Looking forward, while the Banxico would like to ease rates once again, the window of opportunity could be closing. There is a high hurdle for further easing in our view, where local growth looks solid, domestic inflation remains sticky and policy tightening is underway in other emerging economies.

While further tightening was avoided this week, we believe that we have reached peak monetary stimulus in most emerging markets. EM policy makers have not escaped the challenge of mounting inflation pressure, born out of COVID supply bottlenecks and fiscal policy driven commodity price rises. At the same time, policy makers face the challenge of exceptionalism in the US/China; all else equal, where growth differentials skewed against emerging markets, capital outflows are likely to flow away from emerging markets. This seamless flow of global capital is forcing a synchronicity of monetary conditions across emerging economies despite a sharp asynchronicity of their recoveries from the pandemic. Looking forward, we expect further tightening in EM over the coming months, at a time when most are still struggling to recover from the initial pandemic, suffering ongoing reinfection waves and have huge debt burdens in light of their pandemic responses.