Bank Indonesia likely to keep key interest rate unchanged in February

Bank Indonesia is set to meet tomorrow for its interest rate decision. According to a DBS Bank research report, the Indonesian central bank is expected to keep the policy rate on hold as the Fed rate hike has also been on hold lowering pressure to Rupiah. In fact, the IDR has strengthened against the USD by 2.7 percent YtD, owing to the inflows to both bonds and equities.

On the other hand, trade balance has seen a widening of deficit to USD 1.16 billion in January 2019 from a deficit of USD 1 billion in the prior month, in spite of considerably lower oil price compared to last year.

Unlike in 2018 where trade balance concern was due to the imports side, exports deceleration appears to be the theme for 2019 trade balance concern as global trade demand continue to soften amplified by trade war tensions. Moreover, apart from the lower pressure to Rupiah, the BI is expected to stand pat due to the benign inflation.

“We maintain our view that BI tightening cycle has ended in 2019 as inflation is likely to remain stable resulting in a competitive real interest rate. Furthermore, externally we think better overall global financial condition will provide some support to Rupiah”, added DBS Bank.