Bank Indonesia likely to keep policy rates unchanged this week, to remain at 4.25 pct for some time: DBS Group Research

Bank Indonesia (BI) is expected to keep its benchmark policy rates unchanged at 4.25 percent during its monetary policy scheduled this week after lowering it by 25 basis points each at the last two policy meetings. Also, the policy rate is likely to remain at the same level for quite some time now, DBS Group Research reported.

While the current inflation trajectory remains manageable, the central bank cannot afford to be complacent. The main risks to inflation are from two forces – crude oil prices and the rupiah. If crude oil prices were to inch markedly higher going forward, the inflation pass-through from a weaker rupiah is likely to be more significant than what it had been in the past 5 years or so.

As far as the rupiah is concerned, we reckon that BI will prefer to be cautious going forward. USD/IDR has now ticked up to circa 13500, after spending pretty much the first 8 months of this year being stuck at around 13300. In trade-weighted terms, the rupiah is also one of the worst performing units in the region this year.

Then there is also the question if more rate cuts will necessarily lift GDP growth momentum in the near-term. The signs have not been as encouraging as we had thought previously. Despite the 150 bps rate cuts last year, loan growth has remained sluggish this year. On the supply front, it seems that some banks are still holding back from extending new loans aggressively due to an overhang of non-performing loans.

"Expect BI to keep rates unchanged at 4.25 percent for now. At this juncture, we reckon that BI may turn hawkish again sooner than most in the market expects," the report said.

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