Bank Indonesia rate cut is not necessarily in the offing

The big news last week was Bank Indonesia's (BI) slightly dovish policy statement. Even as BI kept rates unchanged as expected, the central bank signaled room for a rate cut ahead. External risks are now seen to be more manageable while inflationary risks have subsided. 

Preventing excessive weakness of the rupiah has been the central bank's priority since the CNY devaluation in early August. And the change in policy tone last week was largely driven by the rupiah's strong performance in October, following the shift in market expectations with regards to US Fed rate hike.

If the rupiah remains stable in the next 3 months or so, then perhaps BI is more convinced to go with a cut. But risks of market volatility persist, especially if US Fed rate hike talks gather steam once again. Given any bout of market volatility, external financing risks may continue to drag sentiment on Indonesia. Even if the current account (C/A) deficit has narrowed to 2% of GDP in 1H15, it has been due to a slump in imports more than anything else. If one expects investment growth to pick up (and thus, stronger GDP growth in 2016), the C/A deficit is likely to widen again, unless there is a sudden spike in export growth. 

BI is likely to maintain a cautious stance. Complacency is not an option at this juncture. Despite BI slightly inclined to a dovish stance last week, expect steady rates to remain for now.