Domestic demand in Indonesia seems to be weaken, in that context, BI would have little monetary policy space to cut rates in order to prop up the weak demand.
Societe Generale forecasts, 2015 GDP would grow at a rate of 4.9% yoy. In case it materialises, this will be the first time since 2009 that GDP growth would tumble below 5%, says SocGen. Also, while the nominal interest rate environment appears to be high, the real policy rate is quite low - even by historical standards.
With inflation hardening in May and moving beyond 7% (way above BI's comfort zone), any rate cut would be counter productive. The already weak currency would then be further impacted, thereby likely affecting the confidence of foreign investors. Indonesia's current account deficit for the year will likely remain high and unsustainable - and financing it will remain a challenge as capital outflow looms, according to Societe Generale.
Furthermore, with corporate debt accounting for more than half of Indonesia's total external debt, a weakening currency can have a telling impact on corporate profitability. Therefore, BI would do well to keep the rate unchanged rather than opt for a cut, added SocGen.
