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Indonesia seen holding policy rates as inflation pace likely to rise

Indonesia seen holding policy rates as inflation pace likely to rise

JAKARTA: Indonesia’s central bank is expected to keep its key rates unchanged after a two-day policy meeting that ends on Thursday, despite disappointing economic growth, as the inflation rate is likely to increase up ahead of the Muslim fasting month.

Many analysts also note Bank Indonesia (BI) may want to avoid confusion while transitioning to a use a new instrument as its main policy rate.

BI has announced that from Aug. 19, it will no longer use the 12-month reference rate as its benchmark rate. Instead, it will use the 7-day reverse repurchase rate.

All but one of 21 analysts in a Reuters poll said BI will keep the current benchmark at 6.75 percent and the future one at 5.50 percent on Thursday.

The other analyst sees a 25 basis point (bps) cut, following three totalling 75 bps earlier this year, to lift economic growth which last year weakened to 4.8 percent, the slowest since 2009.


Southeast Asia’s largest economy grew less than expected in the first quarter, but many economists believe full-year growth can top 5 percent and end five years of slowdown.

Damhuri Nasution, chief economist of Danareksa Research Institute, cited the possibility of inflation creeping up in the short term as the main reason for BI to hold.

Annual inflation rate cooled to 3.6 percent in April, the lowest this year and inside BI’s 3-5 percent target range. But demand tends to rise ahead of Ramadan, which begins in early June, and that can lift inflation.

So far this year, inflation has been significantly lower than in 2015 and the rupiah less volatile, giving BI room to loosen monetary policy. But some analysts say there is no need to ease again at the moment.

Gundy Cahyadi, DBS economist in Singapore, said given the lag time for monetary policy transmission, the bulk of the impact from the first quarter’s cuts “will come in the second half anyway, which is why we think BI may not want to ease further at this juncture, particularly ahead of the switch in policy rate in August”.

While Deutsche Bank said in a note that the economy doesn’t need further monetary stimulus, ING Financial Markets said there is room for one 25 bps cut in the fourth quarter to the new benchmark.

“We think BI has paused rather than ended its easing cycle,” ING said.

Copyright Reuters, 2016

Courtesy : BRecorder



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