Bank Indonesia is likely to keep its policy rate unchanged during its meeting on Thursday, making it the second straight month the BI will stay on hold after delivering six cuts of 25 basis points each during the year, noted Societe Generale in a research report. The country’s macroeconomic backdrop continues to be steady with low inflation and a narrower current account deficit.
Even if headline inflation has moved up continuously from its low of 2.8 percent year-on-year registered in August to reach 3.6 percent year-on-year in November, it continues to be within the Bank Indonesia’s inflation corridor of 4 percent, plus or minus 1 percent.
Indonesia’s balance of payments registered a greater surplus in the third quarter of 2016, underpinned by a narrowed current account deficit along with a rising capital and financial account surplus. The Balance of Payment surplus remained at USD 5.7 billion, a considerable rise from USD 2.2 billion in the prior quarter. The rebounded external balance further strengthened the macroeconomic stability of Indonesia.
Even the Indonesian rupiah is indicating signs of strengthening after initially having reacted negatively after the announcement of the U.S. election results. A stronger currency is likely on the back of increasing flows. Bank Indonesia is unlikely to be averse to a weaker currency to assist stimulate its export prospects. Moreover, Bank Indonesia would also want to remain on hold and wait for additional transmission of its past monetary policy action, added Societe Generale.
