Bank Indonesia likely to keep interest rate unchanged

The Indonesian central bank, Bank Indonesia (BI), is likely to keep its policy on hold during its meeting tomorrow, according to Societe General. The central bank lowered the interest rate for three straight times during its first three meetings this year. The country’s current account and fiscal deficits are likely to disappoint and therefore the BI is unlikely to be oblivious to these issues, noted Societe Generale.

Last month, the country’s headline CPI rose slightly to 4.45% from February’s 4.42% y/y. The data shows that the country’s CPI inflation bottomed out in December. The country had implemented a major reform in December 2014 and got rid of the petroleum subsidy, which resulted in a surge in inflation.

But the continuous downward revision of petroleum products’ retail prices and declining crude prices led to inflation decelerating from January 2015 and then accelerating slightly from January 2016 on an annual basis. Meanwhile, Indonesia’s core inflation has been falling as the rise in inflation is mainly due to volatile and non-core goods. Core inflation has decelerated for six straight months.

“Although rising food inflation is a concern, we think overall inflation will remain relatively well contained, and probably within BI’s target corridor of 4±1%, especially given that the IDR remains one of the better-performing currencies this year, having appreciated by around 4.6% to date in 2016”, said Societe Generale.

BI is expected to put a pause on changing rates and permit sufficient time for proper transmission to take place, added Societe Generale.