Bank Indonesia likely to be patient and make its move only in the second half of this year, says ANZ Research

Bank Indonesia (BI) is expected to be patient and make its move only in the second half of this year, after unsurprisingly keeping its 7-day reverse repo rate unchanged at 6.00 percent at its monetary policy meeting, held last week, according to a recent report from ANZ Research.

Given the recent market volatility, a rate cut by the BI was never likely. Indeed, BI’s accompanying statement noted that the decision “was in line with efforts to maintain the external stability of the Indonesian economy amid uncertainty over the increasing global financial market”.

However, there was a shift in BI’s policy messaging that hinted at potential rate cuts in the pipeline. The statement noted that “Bank Indonesia will keep a close watch on global financial market conditions and the external stability of the Indonesian economy in considering the opening of space for accommodative monetary policy in line with low inflation and the need to encourage domestic economic growth”.

Meanwhile, Governor Perry Warjiyo characterized BI’s monetary policy stance as “cautious, neutral”, as opposed to hawkish previously. Nonetheless, persistent external vulnerabilities suggest the rate hikes undertaken by BI in 2018 cannot be fully unwound, the report added.

The current account deficit came in at 2.6 percent of GDP in Q1, which is an improvement from the 3.0 percent seen for full-year 2018 but above the 2.2 percent seen in Q1 2018. Meanwhile, the trade deficit widened to a record high in April, though a Ramadan-related seasonal spike in imports played a role and a subsequent pullback should alleviate some pressure on the trade balance in June.

While the central bank continues to expect the current account deficit in 2019 to narrow relative to 2018, it is now targeting a smaller improvement, with its forecast now at 2.5-3.0 percent of GDP as opposed to an earlier aim of 2.5 percent.

"Unlike in 2018, BI doesn’t have to deal with a hawkish US Federal Reserve. While BI has pencilled in one Fed Funds Rate hike in 2019 or 2020, we think a prolonged hold is more likely," ANZ Research further commented in the report.