No more room for a BI rate cut this year

BI is not expected to cut the BI rate this year, given current and expected pressures on the Indonesian rupiah (IDR) for the remainder of this year. Further BI rate cuts would only put more strain on the IDR and increase imported inflationary pressures on Indonesia's economy; outweighing the benefit in terms of promoting real GDP growth.

"Now BI is likely to hike the BI rate by 25bps to 7.75% in September in response to the US federal fund target rate (FFTR) hike that will take place in September. This will be required to assure financial market players that BI is taking appropriate measures to defend the IDR. BI is expected to maintain the BI rate at 7.75% in Q4-2015 and throughout 2016. BI is likely to hike the BI overnight deposit facility (FASBI) rate by 25bps to 5.75% and the overnight BI lending facility (repo) rate by 25bps to 8.00% in September; and to keep both rates at those levels in Q4-2015 and in 2016", according to Standard Chartered. 

Given that the US Federal Reserve seems to be signalling to the market that US FFTR hikes will be gradual (presumably by 25bps every quarter), analysts auume, BI is unlikely to hike the BI rate aggressively. Nonetheless, a risk is seen, albeit low, that BI may hike by more than 25bps this year if the IDR comes under severe pressure, expects Standard Chartered.