The Bank Indonesia (BI) in its first monetary policy meeting of 2017 on Thursday, maintained its 7-day reverse repo rate at 4.75 percent, as it was widely expected. This decision was supported by stronger household demand, higher inflation prospects and US rates normalisation and challenging credit transmission.

In our view, the cumulative 150 basis points of rate cuts in 2016 are adequately supportive of consumption and investment. The need and room for monetary easing is reduced amid expectations of firmer domestic demand, higher inflation, US rates normalisation and challenging credit transmission. We thus maintain our view that BI will remain on hold throughout 2017, with a neutral monetary policy stance, reported ANZ in its research note.

We expect real GDP growth to rise to 5.4 percent in 2017, from 5.0 percent in 2016, largely due to increased public expenditure stemming from infrastructure spending, as well as firmer commodity prices. Stronger economic growth in 2017 will reduce the need for monetary easing, even if inflation may climb to 4.6 percent from 3.6 percent in 2016, as the hike in liquefied petroleum gas and electricity tariffs could add around 0.8 percentage points to Indonesia’s headline inflation, they added.

We expect Bank Indonesia to keep the policy rate unchanged for an extended period of time. Even if growth undershoots, whether any monetary easing will take place in 2017 will depend crucially on the actual inflation trajectory.