Economic Analysis - Rate Hold Most Likely As BI Torn Between Objectives - FEB 2018

BMI View: BI is likely to remain on hold in 2018 as it seeks to support economic growth while maintain currency stability amid a hawkish US Fed. We continue to flag the risk that interest rates are too low for the economy, which raise the potential for malinvestment. Should inflationary pressures pick up, BI could be forced to reverse course.

As we expected, Bank Indonesia (BI) kept its benchmark 7-day Reverse Repo Rate unchanged at 4.25% during its last monthly monetary policy meeting for 2017 on December 14 as the rupiah continues to face downside pressures. The corresponding Deposit Facility and Lending Facility rates were also maintained at 3.50% and 5.00%, respectively. We continue to forecast BI to stand pat on its monetary policy in 2018 as it attempts to balance opposing economic objectives, but note that risks to our interest rate forecast are tilted to the upside.

On one hand, despite BI's cumulative 200bps rate cuts since the start of 2016, economic activity has failed to picked up pace (with real GDP growth remaining relatively steady near the 5.0% y-o-y level over the past four quarters), requiring the central bank to maintain an accommodative monetary policy stance in an effort to support growth. On the other hand, the rupiah is one of the worst performing currencies in the region year-to-date (depreciating by 0.8% against the USD), just ahead of the Philippine peso, and continues to face downside pressure, as observed from the falling level of reserves even as the currency range-trades. With the US Fed likely to continue with its rate hiking cycle over the course of 2018, the room for easing will likely be further limited.

BI Likely To Remain On Hold But Risks Are Weighted To The Upside
Indonesia - Central Bank Watch
Source: BMI, Bloomberg

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