Bank Indonesia likely to lower interest rate in upcoming meeting

The Indonesian central bank, Bank Indonesia (BI), is likely to lower rate at its upcoming meeting on 17-18 February, its second consecutive rate cut in 2016. BI is then expected to keep the rate unchanged for the rest of 2016. The nation's CPI increased to 4.1% y/y in January 2016, as compared with 3.4% y/y in December. However, the sharp deceleration in December was mainly due to a high base effect.

Inflation in Indonesia is expected to be moderate until Q2 2016 before accelerating again. Currently, headline inflation is within the central bank's target corridor of 4±1%. Therefore, the central bank gets more-than-adequate monetary policy stance. The core inflation, which decelerated below 4% in January, continues to fall and is currently at the lowest level since March 2010.

In 2016, the IDR has appreciated 2.6% till date, becoming one of the better-performing currencies. The current account deficit has been under control, while forex inflows continue to be strong, mainly due to the stronger-than-expected GDP performance in Q4 2015. The market is also bracing for another rate cut as the 10-year yield has dropped below 8%.

"In light of these factors, we now bring forward our second rate cut expectation from Q3 2016 to Q1 2016. We now expect one final rate cut of 25bp to be announced during the forthcoming meeting, resulting in cumulative cut of 50bp in 2016", says Societe Generale.