Bank Indonesia likely to lower policy rate on Friday

Indonesian central bank, Bank Indonesia, is likely to further ease its policy during its policy review meeting on Friday, stated Societe Generale in a research report. The BI would be lowering its key interest rate for the fifth month in a span of eight months due to low inflation, subdued credit growth and a slow appreciating currency.

The headline CPI inflation in Indonesia came in at 3.2 percent year-on-year in July 2016, lowest since December 2009. As food inflation continues to slow and core inflation curbed, the inflationary path does not pose any challenge to the central bank. Indeed, inflation in Indonesia is quite close to the lower bound of BI’s desired inflation corridor. The central bank has targeted inflation of 4 percent, plus or minus 1 percent.

On the currency front, the Indonesian rupiah has been performing quite well. Given that the possibility of US hiking rates in the remainder of 2016 is unlikely and the recent approval of proposed tax amnesty scheme give an additional leg-up for the currency, the Indonesian central bank now has enough room to move in terms of monetary policy to continue on the easing path, noted Societe Generale.

“August 2016 will be the first month when BI officially moves from Reference Rate to 7-day Reverse Repo Rate (RRR) as the official policy rate. We expect a 25bp cut in the 7-day RRR from 5.25 percent to 5.0 percent”, added Societe Generale.