Bank Indonesia to stand pat, unlikely to change policy rate until August

Bank Indonesia is likely to keep the policy on hold this week, said Societe Generale in a research report. In August of this year, the BI rate will no longer be the policy rate. It will be replaced by the 7-day reverse repo rate. The Indonesian central bank is not expected to change its current policy rate until August even if inflation decelerated below expectations in April, added Societe Generale.

Last month, the nation’s headline CPI sharply slowed to 3.6% from March’s 4.45% y/y. Inflation is likely to continue to be contained in the near future due to the base effect. Even if this is expected to provide a leeway to BI for ease monetary policy, the major worry for the central bank currently is the weak pass-through of the “recent spate of rate cuts to lending rates, thereby blunting the effectiveness of the recent policy-easing stance”, noted Societe Generale.

Bank Indonesia is expected to concentrate on making sure a rapid transmission takes place of the current policy rate cuts to the lending rate in  the coming few months, according to Societe Generale. This might suggest sufficient availability of liquidity, gradual lowering of the lending facility rate and urging banks to cut net interest margin expectations by reducing their borrowing and lending rates, said Societe Generale.