Bank Indonesia keeps key interest rate on hold at 6 pct

Indonesian central bank kept its interest rate on hold today. The 7-day reverse repo rate was kept unchanged at 6 percent, as anticipated. The recent consolidation in USD/IDR provides scope for BI to hold fire after its pre-emptive 25 basis points hike in November.

The decision taken today was consistent with market expectations. The central bank had hiked its policy rate by 25 basis points during its November meeting in a pre-emptive move ahead of the anticipated rate hike by the Fed on 19 December.

Indonesia’s inflation had picked up in November to 3.23 percent year-on-year. The rise does not warrant monetary policy tightening either, noted ANZ in a research report. The headline figure continues to be in BI’s 2.5 percent to 4.5 percent target band and underlying price pressures are still contained.

It is possibly still too soon to call the end of BI’s tightening cycle. Market concerns regarding Indonesia’s current account deficit are expected to persist for now. The trade data released earlier this week indicated the trade deficit broadening from USD 1.82 billion in October to USD 2.05 billion in November, the largest since July 2013. The external environment continues to be highly uncertain and the policy messaging today hinted at a continued focus on currency stability.

“Our current expectation is that there is one more 25bp hike left in BI’s tightening cycle”, added ANZ.