Room for another BI rate cut in Q2

Bank Indonesia (BI) kept the BI rate at 7.50%, the BI overnight deposit facility (FASBI) rate at 5.50%, and the BI overnight lending facility (repo) rate unchanged at 8.00% at its policy meeting on 17 March. 

The central bank stated that it is maintaining a tightening bias to manage inflation and narrow the current account (C/A) deficit. Today's decision was in line with market consensus expectations butagainst our call of a 25bps cut. 

Standard Chartered maintains it views as follows:

• We maintain our call for another 25bps BI rate cut this year, but change the timing to Q2-2015 from March. 
  
  
• We see room for the BI rate to be cut further, as inflation is likely to remain benign and the C/A deficit is expected to narrow this year.
  
  
• We do not expect BI to pursue aggressive monetary easing this year, as the US Fed's rate-hiking cycle - expected to start in H2-2015 - will likely put pressure on the Indonesian rupiah (IDR). 
  
  
• Assuming the Fed delivers its first rate hike in September, we expect BI to hike the BI rate by 25bps each in September and October to defend the IDR from the risk of capital outflows. 
  
  
• We forecast the BI rate at 7.25% at end-Q2, 7.50% at end-Q3, and 7.75% at end-2015.