Bank Indonesia keeps reference rate on hold at 6.75 pct, but likely to lower again in 2016

Indonesian central bank kept the reference rate on hold at 6.75% today, on par with expectations, after lowering the rate three straight times in Q1 by 75bps. Bank Indonesia had kept the rates on hold for most part of last year. This was because of certain factors, such as deceleration in inflation to below 4% by late 2015 due to lower oil prices. The central bank projects inflation to be normal around 3%-5% in 2016. Deceleration of inflation gave the way for the central bank to lower rates in the past few months.

BI is expected to lower rates by additional 25-50bps in 2016, especially if inflation decelerates, noted Commerzbank. Moreover, the central bank is expected to also lower reserve requirement ratio by additional 100-150bps in order to push banks to boost lending.

“We see inflation at 4.4% in 2016 and growth at 5.4% vs the government’s forecast of 5.2-5.6% and 4.8% in 2015”, added Commerzbank.

The Indonesian rupiah has appreciated almost 5% against the US dollar year-to-date, being the fourth best Asian currency after MYR, JPY and SGD. The IDR is likely to remain stable in the near term but rise higher by end of 2016 to 13,900 due to stronger US dollar, noted Commerzbank.