Bank Indonesia likely to cut and signal a long pause

Bank Indonesia (BI) will hold its policy meeting on Tuesday, 17 March. Standard Chartered research notes:

• We expect it to cut the BI rate and the BI overnight deposit facility (FASBI) rate 25bps each to 7.25% and 5.25%, respectively, and to keep the BI overnight lending facility (repo) rate unchanged at 8.00%. 
• We think favourable inflation dynamics will underpin BI's move. 
• We expect inflation to slow to 3.7% at end-2015 from 8.4% at end-2014. However, we acknowledge the risk of BI postponing the rate cut until Q2-2015 given ongoing pressure on the Indonesian rupiah (IDR). 
• We expect the BI rate to remain at 7.25% in Q2. 
• Given that the Fed will likely hike the fed funds target rate in September, we expect BI to hike the BI rate 25bps in September and October to reach 7.75% at end-2015, to defend the IDR against the risk of capital outflows.