Fed rate hike in December could force BI to remain on hold

The Bank of Indonesia (BI) is expected to remain on hold at its monetary policy meeting in November. Indonesia's October CPI printed at 6.25% yoy, marking the second consecutive month of sub-seven percent inflation, and is evidently on an easing trend. Although headline inflation is currently above the BI's target corridor of 4±1%, it is expected to ease further going forward as the base effect starts to kick in from December. 

Indonesia's economy has undoubtedly weakened this year, and the recently released Q3 2015 GDP data confirm this. At 4.73% yoy, the GDP print came in lower than the market expectation (4.80%) though a bit higher than expectation (4.63%). Household demand, traditionally an important growth driver for the economy, remains subdued, having racked up sub-5% growth rates back-to-back this year. A weak currency and high borrowing costs have resulted in anaemic growth in consumer loans. 

Better current account data, contained inflation and a recovering currency have provided BI with a previously elusive opportunity to shift its focus to growth and use monetary policy to stimulate the weak economy. However, although the domestic macro parameters have become more conducive for a rate cut at this juncture, the immediate driver is likely to be the timing of the Fed rate hike. When the December hike was looking quite iffy, the probability of a rate cut increased (from current level of 7.5%) given the window of opportunity available. 

However, with the latest US NFP (Non Farm Payroll) data turning hugely favourable and a December rate hike now commanding a higher probability, it is believed that BI could be forced to remain on hold for the time being. A rate cut at this juncture could put higher downward pressure on the currency in the event that a Fed hike materialises. For BI, it would be prudent to remain on hold and allow the dust to settle post the rate hike. 

"We expect the next easing move to take place during Q1 2016", notes Societe Generale.