Indonesia vigilant in loosening monetary policy stance

As widely expected, Bank Indonesia (BI) kept its policy rates unchanged on Tuesday. BI lowered the primary reserve requirement rate from 8% to 7.5%, however, to signal the shift to a looser policy stance. CPI inflation is expected to be well within the 3-5% target by the year-end, giving the central bank the justification to loosen its stance. 

Whether BI will move to trim its policy rate in December is anyone's guess at this point. But BI sounded more hawkish this time compared to last month, signalling that GDP growth momentum has picked up pace on the back of accelerated fiscal spending. GDP growth is seen to come in around 4.7-4.8% this year and 5.2-5.6% next year - pretty much in line with the forecast. Household consumption remains strong and BI's main concern mostly stems from the lingering uncertainties in the global economy. Indeed, BI stresses the need to balance between downside risks to global growth and potential volatility in global markets due to the US Fed rate lift-off. 

Stability of the financial system, including that of the rupiah, is a policy priority for BI. The central bank reiterated this point in yesterday's statement and noted that the stronger rupiah in October was partly due to a dovish statement from the US Fed in late-September. On this front then, the US Fed rate decision in December is likely to be a key factor in BI's rate trajectory going forward. Note that BI's policy meeting in December is scheduled just after the Fed rate meeting. If, the US Fed were to raise rate in December and signal a 25bps hike in every quarter next year, BI is unlikely to deliver a rate cut in December. BI rate may remain steady at 7.50% for quite some time.