Bank Indonesia likely to keep interest rate unchanged in November

The Indonesian central bank, Bank Indonesia, is expected to stand pat during its policy meeting tomorrow, according to a Societe Generale research note. The central bank had unexpectedly lowered the BI 7-day Reverse Repo Rate by 25 basis points during its earlier meeting. The surprising move last month was mainly driven by subdued investment activity, an overall weak economy, a relatively stable exchange rate and low inflation.

It appears that intensifying worries about economic growth and monetary policy transmission staying weak, the Bank Indonesia believes a more rapid pace of easing would eventually result in improved transmission, stated Societe Generale.

It also seems likely that with the government running out of adequate fiscal space, the weight of bringing growth back on the path has fallen totally on the central bank and its monetary policy. Moreover, given the subdued export performance, the Indonesian central bank wanted to offset any possible appreciation pressure.

The headline consumer price inflation is likely to stay close to the central bank’s target inflation corridor floor in the coming few months, before beginning to move up as the favorable base effect fades. At present, the central bank is unlikely to opt for rate reduction during the rest of this year. However, it is expected to deliver a final rate cut in the first quarter of 2017, followed by a long pause, noted Societe Generale.