06/15/2015
Indonesia / Rates
Indonesia’s central bank is expected to keep policy rates steady this week, in light of concerns over financial system stability, inflationary expectations and external financing risks.
Expect Bank Indonesia (BI) to keep policy rates steady at 7.50% this week. Recent data have been rather poor and this week’s trade data will only emphasise that domestic demand remains weak. While the trade balance may post a surplus of around US$0.7 billion in May, it comes on the back of poor import growth more than anything else.
Private consumption stays relatively strong, on trend at 5%, but it has been shouldering a lot more responsibility in supporting overall GDP growth. Export growth is weak, investment is sluggish and fiscal policy has been disappointing. It remains to be seen if the government will come through on its promise to accelerate fiscal spending in the year’s second half. Up until May, fiscal spending was running at about 30% of the full-year target.
Volatility in the financial markets, and especially the weak sentiment on the Indonesian rupiah, means there is not much that BI can do at this juncture. While the central bank has been tolerant of a weaker rupiah, sentiment among business owners is also being weighed down by the currency’s weakness. Lowering the policy rate may help to boost loan growth marginally; but there is a risk that this may drag the rupiah down even more, making it less likely that businesses will demand new loans.
Focusing on financial system stability is the central bank’s new mantra. Let’s not forget that there are also lingering concerns over inflationary expectations and external financing risks. Considering all these, it is not hard to see why BI will maintain its tight policy bias for now.
