Bank Indonesia keeps policy rate on hold, likely to hike rate by 25 bps in August

The Indonesian central bank, Bank Indonesia, stood pat during its meeting today after hiking the policy rate by 100 basis points between May and June. The central bank’s decision to keep the rate on hold at 5.25 percent was consistent with market expectations. The policy messaging was widely unchanged with BI reasserting its focus on ensuring IDR stability and at levels that are consistent with fundamentals. It should be borne in mind that the central bank has on occasion expressed the view that the Indonesian rupiah is undervalued.

A notable change was in its assessment of 2018 GDP growth. Though the central bank maintained its 2018 forecast range of 5.1 percent to 5.5 percent, if conceded that it was more likely to be at the lower end of this range.

This is in spite of the fact that full year loan growth estimate of 10 percent to 12 percent was retained, suggesting a considerable rebound from the January – May average rise of 8.7 percent. Inflation is likely to stay well anchored whereas the current account deficit is expected to remain below 3 percent of GDP, stated ANZ in a research report. The re-emergence of a trade surplus in June was encouraging in this regard.

The Indonesian central bank announced that it would launch a new market determined overnight benchmark rate. It is also seeking to reactivate issuance if ninth month and 12th month BI bills. The overall policy stance has been characterised as hawkish, suggesting that the central bank would hike policy rate should rupiah softness resurface.

“For now, we expect BI to raise its policy rate by 25bps at the August meeting and remain on hold for the rest of the year. A change in IDR volatility will warrant a reassessment of our forecast”, added ANZ.