Bank Indonesia keeps interest rate unchanged at 4.75 pct, likely to remain on hold in 2017

As widely anticipated Bank Indonesia kept its 7 day reverse repo rate on hold at 4.75 percent during its meeting today. The central bank projects a subdued global economic rebound, but it foresees earlier reductions in the policy rate as sufficient to underpin economic growth. With solid fiscal support, Bank Indonesia is likely to stay on hold for a longer period of time, according to an ANZ research report.

Private consumption growth has provided a buffer in 2016, but growth in investment has been weak, limited by public capital expenditure. For next year, the Indonesian government has placed a firmer focus on infrastructure spending. The 2017 allocation for infrastructure of IDR 387.3 trillion is 22 percent higher than what had been allocated in the 2016 Revised Budget, noted ANZ.

Credit transmission continues to remain weak. The moderate rise of the nonperforming loans ratio, which reached 3.1 percent by the end of September quarter would probably limit credit growth. Moreover, the caps on deposit rates would continue to restrict the ability of banks to attract deposits. The loan-to-deposit ratio, as of September 2016, has increased to 91.7 percent from an average of 89 percent in 2015.

“Looking ahead, we expect BI to maintain rates in 2017, barring any significant deterioration in the economy”, added ANZ.

Furthermore, the consumer inflation figure accelerated in November to 3.58 percent year-on-year from 3.31 percent in October. This reinforces the view that inflation troughed in the third quarter and is expected to maintain its ascent.

“If growth undershoots, any additional monetary easing in 2017 will depend on the actual inflation trajectory, which we expect to print higher on hikes in LPG and electricity tariffs”, stated ANZ.