Bank of Indonesia rate to remain unchanged

The Bank of Indonesia (BI) is expected to remain on hold during its monetary policy meeting in August, even as the economy braces for its second sub-5% annual growth since the financial crisis hit us. With inflation hardening and the IDR remaining much weaker than official expectations, a rate cut at this juncture would be an ill-advised move. 

While the external situation remains unfavourable, Indonesia is fast losing the available window to cut rates and boost its weakening economy. Indonesia's July CPI printed at 7.26% yoy, the same as in June and much higher than the BI's comfort level of 5%. As the favourable base effect from the plunge in oil prices starts to fade in the coming months and hence inflation remains elevated, the BI may be constrained in its ability to support growth through easy monetary policy actions. 

The problem has been further compounded by the perennially weakening currency. The recent devaluation of the CNY that has shaken the world has led the IDR to plunge even further, breaching the 13,800 mark - very close to the lows seen during the Asian financial crisis. This, in itself, will ensure that the benefits of the lower crude price will not be realised in terms of its pass-through to headline inflation, which should therefore stay at elevated levels. With investors moving into risk-off mode, leading to further outflows, and the potential hike in Fed rates looming, the pressure on the currency can only rise. Hence a policy rate cut should not be in the BI's agenda.