Bank Indonesia likely to hold policy rate steady this week until stronger data is out, says DBS Bank

Bank Indonesia (BI) is widely expected to hold its policy rate steady this week as there is no compelling reason to trim its policy rate further at this point. Inflation is already back above 4 percent y/y and the upward bias remains prevalent. GDP growth came in at 5.0 percent in Q1 2017, a tick higher than 4Q16.

While the inflation threat remains, two things are key for the central bank this year. First, stronger domestic growth momentum. Household consumption and total investment growth both came in sub-5 percent in 1Q17. If not for export growth, GDP growth would have come in sub-5 percent as well in 1Q17. Loan growth might have improved, but it is still slower than anticipated. Until stronger data is out, BI is likely to maintain its accommodative stance, DBS Bank reported.

Second, BI will continue to maintain the stability of the rupiah. On this front, it is important to point out that the unit has been rather stable so far this year. The capital and financial account registered a strong surplus of USD 7.9bn in 1Q17, almost double the amount in 1Q16. More importantly, the current account deficit remains at a manageable level, 1 percent of GDP in Q1 this year. Given the rupiah performance in the year-to-date, there is no need for BI to provide any further support by way of a rate hike.

"While we have previously expected a 25 basis points rate hike in H2 2017, chances of it happening are slimmer now given the slightly underwhelming Q1 2017 GDP data. A close monitoring of data in the coming months is warranted," the report commented.