Bank Indonesia likely to keep interest rate on hold

Bank Indonesia is expected to stand pat during its meeting tomorrow after cutting the BI 7-day Reverse Repo Rate by 25 basis points in the previous meeting as was anticipated by the market, according to Societe Generale. The Indonesian central bank cut its rate last month due to low inflation, relatively stable exchange rate and particularly weak investment activity.

The Bank Indonesia is expected to stay on hold during the fourth quarter of this year and is likely to concentrate more on improving the transmission of monetary policy action, particularly through the credit channel. The available indications imply that domestic credit growth might have slowed to 6 percent year-on-year in the third quarter of 2016; however, BI still continues to keep its credit growth target of 7 percent to 9 percent year-on-year for this year, noted Societe Generale.

The tax amnesty scheme outcome has been disappointed, resulting to a weak rate of repatriation of declared assets and total tax collection at about just 57 percent of the target, in spite of the period’s expiry with the lowest penal rate, added Societe Generale. Therefore, the anticipated stimulus to the Indonesian rupiah has not materialized.

Moreover, with a U.S. Fed rate hike looming, the central bank might prefer keeping the interest rate on hold during this point. It is expected to focus more on the transmission of past monetary policy actions, stated Societe Generale.