Bank Indonesia keeps key interest rate on hold, likely to hike by 25 bps in June 2019

The Indonesian central bank stood pat during its monetary policy meeting today. As expected, Bank Indonesia maintained its 7-day reverse repo rate at 6 percent for the second consecutive month. The recent strength in the IDR gave scope for the central bank to stand pat.

In 2018, the central bank had hiked its interest rate by an aggressive 175 basis points in order to fight currency weakness; however, the recent strength in the rupiah has allowed the BI some room to stand pat. During the central bank’s press conference today, Governor Perry Warjiyo repeated that BI’s focus is on rupiah stability but also said that the currency is likely “to remain stable with trend toward strengthening” and that the policy rate is near its peak.

There are many factors that imply the impetus for additional tightening of monetary policy is diminishing. A less hawkish Fed suggests less pressure on EM currencies, including the IDR. The decline in global oil prices since October also lowers the strain on the current account deficit, noted ANZ in a research report. The trade data released earlier this week indicated that oil and gas deficit narrowed greatly in December, owing to a 23.3 percent year-on-year decline in imports.

Also, the non-oil and gas import growth decelerated last month, implying that earlier policy measures to rein in imports, including monetary policy tightening, are beginning to be transmitted into the real economy. Inflation dynamics do not warrant monetary policy tightening either, said ANZ.  The central bank expects headline inflation come in below the mid-point of its target band in 2019 and growth to be in the 5-5.4 percent range.

“Our view has been for BI to follow the US Fed’s lead to keep domestic assets attractive for foreign investors and we are maintaining our forecast for one more 25bp rate hike by June 2019 for now”, added ANZ.