The Bank Indonesia (BI) is expected to hold its first monetary policy meeting on Thursday, January 19. It is widely expected to keep its benchmark interest rate unchanged at 4.75 percent for foreseeable future as the central bank will continue to monitor how the rupiah fares in 2017.
Looking ahead, faster debt growth suggests that investment growth is indeed accelerating, as also suggested by recent import data. There is no strong push factor for Bank Indonesia to go even more accommodative than it currently is, reported DBS Group Research.
Meanwhile, risks on inflation are tilted towards the upside. Revision in fuel and electricity prices as well as the recent upward pressure on food prices will have an impact on price expectations going forward. Not that inflation will surge beyond Bank Indonesia’s 3-5 percent target for now, but we reckon consumer inflation may average 4.5 percent in 2017, a full percentage point higher than in 2016, they added
Indonesian currency has been relatively resilient since last year, amid improved domestic fundamentals. Risks stem mostly from external factors, given that markets may have been underestimating the US Fed rate hike intentions for the year. As such, we reckon that BI will exercise more caution in setting its monetary policy stance in 2017.