Bank Indonesia likely to ease monetary policy as deflationary pressures still exist

Bank Indonesia is expected to lower its benchmark interest rate further as the current stage of persisting deflation opens door to a series of rate cuts in the near term.  Further, deflationary pressure persists in the transport and communications component of the consumer price index (CPI) and housing inflation stays benign while food inflation remains modest at 5 percent pace.

Given that the government is expected to ease the pace of its spending going forward, BI may feel compelled to do more to support GDP growth momentum going into 2017. As CPI inflation is set to come in within the lower half of its target range, there is a greater likelihood now that BI may trim its policy rate by another 25 basis points before the year-end. The rate cut may be delivered when the central bank meets this week, DBS reported.

Certainly, the Federal Open Market Committee meeting scheduled this week could be a factor that weighs on BI decision. Concerns over volatility in the markets remain at large. At the same time, it can be reckoned that the market now believes that it can stomach a 25bps rise in the Fed funds rate, ready to move on from the lingering uncertainties.

Meanwhile, BI has been building its foreign reserves, while containing the growth in short-term external debt. For now, there is presumably enough ammunition to weather out any short-term bout of market volatility, the report added.