Bank Indonesia keeps policy rate on hold, likely to remain on hold over rest of 2017

The Indonesian central bank, Bank Indonesia, today kept its policy rate on hold at 4.75 percent, as expected and in the midst of an environment of stable growth and curtailed inflation. The 7-day reverse repo rate has remained unchanged since October 2016.

According to an ANZ research report, the Bank Indonesia’s assessment that Indonesian growth would continue to improve in the second quarter is likely, underpinned by strong exports, consumption and investment.

Consumption is expected to be supported by the distribution of the Hari Raya allowance. Consumer sentiment is also at an all-time high, with jobless rate currently at a record low of 5.33 percent. Investment is expected to be stimulated by government infrastructure spending. Better fiscal revenue collection in the first quarter has moderately enhanced the space for higher infrastructure spending in the quarters ahead, stated ANZ.

Nevertheless, a major expansion in growth that risks inflation coming above the central bank’s inflation corridor of 3 percent to 5 percent is unlikely. Headline inflation is expected to accelerate but largely reflecting higher electricity and fuel prices. Core inflation has stayed benign, implying that demand conditions are still not solid enough to lead to a significant pass-through of administered prices.

“We are therefore of the view that BI will remain on hold over the rest of 2017”, added ANZ.