Bank Indonesia kept its policy rate unchanged at 7.50% at its October meeting

Bank Indonesia kept its policy rate unchanged at 7.50% at its October meeting, the eighth straight on hold decision since the unexpected cut in the policy rate on 17 February. The decision was in line with consensus (Bloomberg: all 25 economists). There were also no changes to the lending facility and deposit facility rates, which were maintained at 8.00% and 5.50%, respectively.

The unusually late release of the BI decision today, coupled with the governor's press conference comments, reflected a difficult debate on setting the conditions for (1) relaxing the current tight monetary stance and (2) the timing window of the intended easing. On one hand, BI hinted more strongly at the need to boost growth. It also hinted at late Q4 as a possible window for easing, as it expected inflation to recede to below 4% by December (Sep: 6.8%). Indeed, proponents of easing within BI have been encouraged by the recent 9% rebound in the value of the IDR since 1 October, regaining part of the 13.5% drop between 1 May and 1 October. Another factor of support is easing inflation, which has receded below 7% for the first time in four months in September, as food (chili) prices started to stabilize. 

Inflation has hovered above 7% since May for four months, as government policies to curb imported corn has also pushed up poultry prices. However, a key risk that BI faces in this framework is again food inflation, which could partly negate the drop in fuel inflation in the last two months of the year, when El Nino weather patterns are expected to peak. Another key risk is resurgent capital outflows and pressure on the IDR, both of which would be accentuated if BI were to signal an easing bias prematurely.

"We now see a small but growing risk that BI may shift to an easing stance from late Q4, as early as the 17 November meeting - especially if disinflationary pressures are stronger than expected. This could come, even as we believe the focus will shift to fiscal spending, deregulation and the easing of macro prudential measures to revive growth and foreign investment", notes Barclays.