Bank Indonesia keeps key interest rate unchanged, headline inflation likely to remain in BI’s target corridor

Bank Indonesia kept its key interest rate on hold at 6 percent today. There was not much in the policy statement and press conference that implied an urgency to act at the next meeting.

The central bank’s decision was consistent with attempts to bolster external stability. It noted that the balance of payments was expected to be in surplus in the first quarter, implied by a lower current account deficit and a considerable surplus in the capital and financial account on the back of a pick-up in foreign inflows, noted ANZ in a research report. Nevertheless, the central bank maintained its 2019 current account deficit forecast at 2.5 percent of GDP. It expects the CAD to broaden in the second quarter on seasonal factors, but continue to be below 3 percent of GDP.

Bank Indonesia keeps its 2019 GDP growth forecast at 5 percent to 5.4 percent, and stated that it expects the first quarter growth at 5.2 percent. It stated that consumption continues to be solid, underpinned by sustained purchasing power, sentiment and a supportive fiscal policy. Investment is assessed to have decelerated but is likely to recover on the back of improving business sentiment and continuing infrastructure projects. Exports are likely to stay subdued due to both weak global growth and falling commodity prices.

“However, we believe that investment activity has slowed sharply with high frequency indicators such as imports of capital goods, commercial vehicle and cement sales being unusually weak”, said ANZ.

The conditions for the central bank to partially unwind its earlier rate hikes are believed to be coming together. In additional to a rebounded external position and softening investment activity, the IDR has been pretty stable in recent months and the historic volatility of the USD/IDR has also dropped considerably. The central bank also believes that the U.S. Fed will not hike its policy rate this year or next year, which would in turn be supportive for foreign inflows and thus the IDR.

Benign inflation also adds to the case for monetary policy easing. Headline inflation has softened in recent months and averaged just 2.62 percent year-on-year in the first quarter, close to the bottom end of central bank’s 2.5 to 4.5 percent target band. Inflation would have been higher were it not for fuel subsidies, but even with a complete benchmarking of domestic fuel prices to global prices, headline inflation is still likely to remain in the central bank’s corridor, said ANZ.

“BI today also announced a range of accommodative policies, signalling a rising emphasis on supporting growth. For instance, BI plans to increase the availability of liquidity, simplify DNDF rules, and develop the commercial paper market as an alternative short-term funding source for companies”, added ANZ.