BI rate to remain unchanged

Indonesia's June CPI surged to 7.26% yoy, the highest print in 2015 and much higher than BI's comfort level of 5%. As the favourable base effect from the plunge in oil prices starts to fade in the coming months, BI may be constrained in its ability to support growth. While appreciating the futility of cutting rates, BI has eased some macro-prudential regulations in an effort to boost growth: It loosened lending rules in late May, and it plans to cut the loan-deposit reserve ratio requirement. However, BI is unlikely to go down the path of a rate cut.

"The Bank of Indonesia (BI) is expected to continue on hold during its monetary policy meeting in July despite clear signs of economic weakness emerging. With inflation hardening and the IDR remaining much weaker than official expectations, a rate cut at this juncture would be an ill-advised move, states Societe Generale.

Unfortunately, conflicting signals are now emerging from policy makers. While BI governor Agus Martowardojo believes in maintaining a tight monetary policy stance, Indonesia's vice president, Jusuf Kalla, has been pushing for the easing of rates. However, the fact remains that the IDR is still weak and continues to be the worst-performing Asian currency, anticipates SocGen. Any further monetary easing may prove counterproductive, as it may cause the rupiah to depreciate and, consequently, reduce domestic purchasing power.