Bank Indonesia likely to cut the 7-day reverse repo by 25bps to 4.50 pct in Q4 2017, says ANZ Research

Indonesia’s Q2 economic activity was primarily weighed down by a contraction in government expenditure. Growth in household consumption was also lacklustre. This sluggish growth momentum combined with benign core inflation is likely to result in renewed monetary easing.

Indonesia’s Q2 growth remained stable. Firmer growth in investment (which contributed 1.7ppts), along with continued expansion in household consumption (+2.7ppts) and net exports (+0.6ppt), mitigated the contraction in government consumption (-0.2ppt). Looking ahead, considering an absence of support from commodity prices, it is unlikely that q/q seasonally adjusted growth will exceed 1.4 percent in both Q3 and Q4 2017, ANZ Research reported.

This translates into full year 2017 growth of 5.2 percent. At a component level, we see household consumption growth remaining modest. The upturn in consumer sentiment has yet to translate into realized spending. Retail sales and other consumption indicators such as motor vehicle sales remain stagnant. The same is true for investment.

Although investment indicators, including commercial vehicle sales, capital goods imports, and cement sales have accelerated, much of the improvement has been on account of low base effects. On the inflation front, headline inflation is unlikely to accelerate with no further administered price hikes on the horizon and prices of non-subsidized fuel to be maintained at least until September.

"Core inflation should remain moderate, reflecting the absence of demand pull pressures. Accordingly, we now expect Bank Indonesia to cut the 7-day reverse repo by 25bps to 4.50 percent in Q4 2017. Five more policy meetings are scheduled for the rest of the year," the report said.

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