BI rate to remain unchanged

While external situation remains unfavourable, Indonesia is fast losing the available window to cut rates and boost its weakening economy. Indonesia's August CPI printed at 7.18% yoy, which was tad lower than that of July (7.26% yoy) and much higher than the BI's comfort level of 5%. 

"The Bank of Indonesia (BI) is expected to remain on hold during its monetary policy meeting in August, even as the economy braces for its second sub-5% annual growth since the financial crisis hit. With inflation hardening and the IDR remaining much weaker than official expectations, a rate cut at this juncture would be an ill-advised move", says Societe Generale.

As the favourable base effect from the plunge in oil prices starts to fade in the coming months and hence inflation remains elevated, the BI may be constrained in its ability to support growth through easy monetary policy actions. The problem has been further compounded by the perennially weakening currency. 

The recent devaluation of the CNY that has shaken the world has led the IDR to plunge even further, breaching the 14,000 mark, very close to the lows seen during the Asian financial crisis. This, in itself, will ensure the benefits of the lower crude price will not be realised in terms of its pass-through to headline inflation, which should therefore stay at elevated levels. 

"Add to that the severe drought situation that is currently prevailing, and the situation looks ominous. With investors moving into risk-off mode, leading to further outflows, and the potential hike in Fed rates looming, the pressure on the currency can only rise. Hence a policy rate cut should not be in the BI's agenda", added Societe Generale.