Bank Indonesia likely to stand pat in October

Bank Indonesia is set to meet for its policy decision tomorrow. According to a DBS Bank, the Indonesian central bank is expected to keep the policy rate on hold even if the financial market pressure continues.

The Indonesian rupiah, since the last policy meeting, has weakened nearly 2 percent against the US dollar and 10Y yield rise by additional 66 basis points. Nevertheless, there are many positive developments that are believed to have outweighed the financial strain, giving the central bank space to stand pat this week.

Firstly, September trade data has surpassed market expectation, recording a surplus of USD 27 million, as compared with consensus expectations of USD 500 million deficit. Secondly, inflation has continued to stay benign, owing to steady fuel prices and food prices.

The rise in fuel price last week might barely impact the inflation and trade balance, as the rise only impacts a bit of fuel consumption. Increased oil price has led to increased uncertainty regarding the timing and magnitude of future price adjustments and hence how it will affect future inflation.

Meanwhile, risk to inflation might also come from increased production cost, as seen by increasing wholesale price. Since the end of 2017, increased production cost did not translate into increased price causing corporate sectors to bear lower profit margins, stated DBS Bank.