Bank Indonesia keeps interest rate on hold, likely to hike in December

Indonesian central bank, Bank Indonesia, today kept the 7-day reverse repo rate on hold at 5.75 percent, as was widely expected. The central bank had hiked the interest rate during its last two meetings by a total of 150 basis points, owing to softness in the Indonesian rupiah.

In the recent weeks, pressure on the rupiah has alleviated, which provided the central bank some scope to stand pat today. Better results of trade and fiscal data have aided in stabilizing sentiment towards the currency, driven by an easing in non-oil and gas imports, while the government hinted that its 2018 budget deficit is expected to be smaller than previously expected on the back of solid revenue growth.

Meanwhile, BI said that the economic growth decelerated in the third quarter and stated that the outlook for the whole of 2018 is expected to be at the lower end of its forecast range of 5 percent to 5.4 percent. In the meantime, inflation is not an issue and is likely to remain in the target band of 2.5 percent to 4.5 percent.

In spite of the slightly softer economic growth outlook, the rate pause is unlikely to mark the end of the central bank’s BI’s tightening cycle, noted ANZ in a research report. Given that the external environment is expected to stay challenging, Bank Indonesia’s focus is likely to stay on ensuring external resiliency.

“To keep domestic assets attractive for foreign investors, BI is likely to follow the US Fed’s lead. Based on ANZ’s Fed Funds Rate (FFR) forecasts, this implies a 25bp increase each in December 2018 and June 2019. More aggressive rate hikes could be on the cards should IDR stability come under threat again” added ANZ.