Bank Indonesia keeps policy rate on hold, policy stance likely to remain neutral through 2018

The Indonesian central bank, Bank Indonesia kept its policy rate on hold today, as expected. BI maintained the key interest rate at 4.25 percent. The policy stance continues to be neutral. The central bank sees its earlier reductions in the policy rate as sufficiently supportive of the recovery in domestic demand. The central bank kept its growth forecast for this year in the range of 5.1 percent and 5.5 percent.

The expectation of continued rebound in domestic demand pivots on solid investment growth. Yet, the accompanying growth in imports is projected to broaden the current account deficit to 2 percent to 2.5 percent of GDP. Even so, the central bank is of the view that the external accounts will continue to be curtailed, noted ANZ in a research report.

Higher interest rates in the U.S. and the recent sharp rise in volatility are becoming more and more and impediment to further monetary easing, especially in light of the high foreign ownership of local currency bonds.

Bank Indonesia is expected to focus on the improvement of its monetary policy transmission with the existing policy mix. Even after the cumulative 50 basis points cut in interest rates in August and September last year, credit growth has continued to be weak. Last year, credit growth was 8.2 percent year-on-year, barely above the lower bound of the central bank’s revised 2017 target. Going forward, the central bank sees room for lower lending rates and projects credit growth to accelerate to 10 percent to 12 percent this year.

“We reiterate our view that monetary policy will remain neutral with BI maintaining its 7-day reverse repo rate at 4.25 percent through 2018”, added ANZ.

FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest