Leading indicators for Indonesian monetary policy – and January's surprise

Indonesia's central bank has a dual mandate: control inflation, but also ensure stability in the rupiah's exchange rate.

We created a probability model that gathers different indicators to assess the likelihood of Bank Indonesia's next move. It was trained on monthly data spanning 2014-2022.

Its inputs include the 10-year yield on Indonesian government bonds, currency movements, inflation deviations from the central bank's target, and (to a lesser extent) stock-market trends.

For the "policy position" bars in our chart, a value of 1 indicates a tightening move by the central bank, while -1 indicates easing. These have almost always coincided with our probability model pointing in a tightening or easing direction.

There have been some significant exceptions – and Indonesia's policy makers have a history of surprise moves. As our chart shows, the central bank raised rates in April of 2024 at a time when our probability model had a more or less neutral stance.

Another surprise occurred on Jan. 15, 2025: Bank Indonesia unexpectedly cut rates. What would our model be saying? (CPI has not been released yet, so it did not have the full picture and thus our first chart stops last month.)

We've added three more charts isolating contributing factors in our model: policy changes' correlation with 10-year yield moves, rupiah depreciation, and above-target inflation.

The trajectory of both forex rates and bond yields pointed towards a tightening bias. But subdued inflation relative to the central bank's target (coupled with concerns over uncertain US. trade policy) provided BI with room to ease monetary conditions.

If you are a CEIC user, access the story here.