Bank Indonesia likely to lower interest rate during policy meeting

The Indonesian central bank, Bank Indonesia, is likely to lower its key policy rate again on Thursday after pausing for a short period following three consecutive rate reductions. BI is expected to lower rate as a comparatively stable currency and low inflation provides adequate monetary policy scope for Indonesia, noted Societe Generale in a research report.

Moreover, given that the US Fed is highly unlikely to hike rates in December, the Indonesian central bank can stop being concerned regarding the effect on currency and concentrate on reviving the economy.

Headline CPI in Indonesia continued to stay benign at 3.45 percent year-on-year in June. However, it was slightly higher than the previous month’s figure of 3.33 percent year-on-year. Significantly, food prices continued to be modest in spite of the Ramadan effect. Thus the monthly inflation of 0.66 percent in June is not a threat to the central bank, said Societe Generale.

On the currency front, the Indonesian rupiah has been performing well. Given that the US Fed is now unlikely to hike rate during the rest of 2016 and the recent permit of the proposed tax amnesty scheme, the central bank has enough leeway to move in terms of monetary policy to continue on the easing path, stated Societe Generale.

The central bank’s monetary policy stance is expected to concentrate on GDP growth that remains subdued. The below double-digit credit growth continues to be a reason to worry.

The banks in Indonesia have so far reacted to a 100 basis point rate cut by lowering their lending rates by 50 bais points. It is possible that the central bank might want lending rates to be lower even more and might use a lower policy rate to urge the banks to guarantee rapid transmission of monetary policy action, according to Societe Generale.