Bank Indonesia likely to maintain prudent policy stance on economic recovery

The Bank Indonesia (BI) maintains a prudent policy stance in the wake of rising expectations of economic recovery. The gross domestic product (GDP) growth momentum is expected to pick up at a gradual pace in the coming months. Also, latest trade data continued to paint an improved outlook for the economy, particularly with the trade data suggesting that import growth has bottomed out, reported DBS Bank in its research note.

Loan growth has ticked up to 8.5 percent y/y in November last year and it is likely to continue rise even in 2017. Inflation is also creeping up higher. CPI inflation is likely to have ticked up to 3.2 percent y/y in the first month of 2017. Also, inflation expectations have gone up alongside the proposed revision in electricity prices while food prices have also been trending higher, they added.

Moreover, the DBS bank in its research note raised its CPI forecast to around average 4.5 percent for 2017, up from 3.5 percent last year. Additionally, as also indicated in the latest statement, Bank Indonesia is closely watching developments in the US and China. Given the need to avoid excessive market volatility, external policy risks matter.

Lastly, the DBS added unless there is a fewer than expected rate hike from the US Fed, it is unlikely that Bank Indonesia will cut its key policy rate further even if the central bank were to maintain an accommodative bias.