Bank Indonesia likely to keep policy stance intact following improved fundamentals, Moody’s positive outlook

Bank Indonesia (BI) is expected to keep its policy stance intact this week. There has been a string of positives in the run-up to the policy meeting this week. Moody’s positive outlook on Indonesia’s rating served as an acknowledgment of the economy’s improved fundamentals.

Further, the current account (C/A) deficit has narrowed to 0.8 percent of GDP in 4Q16. IDR has been pretty resilient around the 13300 level against the greenback. And confidence on the economy seems to be on the rise, even if the government only expects GDP growth to improve a tick to 5.1 percent this year.

At the same time, risks remain. CPI inflation is rising slightly faster than expected (CPI inflation is reckoned to hit 4 percent before the mid-year). BI is likely to warn on more inflationary risks going forward, pretty much along the same line delivered by the other regional central banks last week, DBS reported in its latest research publication.

Moreover, uncertainties remain dominant in the global economy with the trajectory of Federal Reserve rate hikes likely to be closely watched by the central bank. For now, there is simply no good reason for BI to steer away from its current policy stance. Chances of another rate cut are limited by the inflation outlook.

"But BI is also not in a rush to raise rates, until there is a stronger conviction of the recovery in private investment growth this year. Among others, loan demand will be closely monitored by the central bank," the report added.