Bank Indonesia likely to continue easing policy with cautious approach

The Indonesian central bank, in its current policy easing cycle, has been very aggressive. Since late 2015 the central bank has cut its reserve requirement rate by 150bps and has also lowered its key BI rate by a total of 50bps in 2016. There are high expectations that the Bank Indonesia (BI) will continue to ease its monetary policy, especially since there is no near-term threat on the inflation front. BI governor's recent comments imply that the central bank will continue to be wary in this policy easing cycle.  It is not a surprise that BI will take this approach.

The medium-term inflation trend is considered to hover around 5%, close to the celing of BI's target rate. If the Indonesian government cannot cut the logistics costs considerably amidst the infrastructure bottlenecks, inflation can be higher. Meanwhile, the stronger IDR has given room for the central bank to lower rates.

However, markets are still volatile and there is no guarantee that the rupiah will continue to appreciate or remain stable. Even though the currency has appreciated around 6% since September on nominal effective exchange rate (NEER) basis, it still has to rebound from the grounds lost in 2013. If confidence turns against the currency, the central bank will be pressureized to intervene and avert capital outflows.