Here's why a 25bps rate hike looms in Indonesia

Will fuel subsidy affect monetary stance big time?

According to DBS, Bank Indonesia (BI) meets today and a 25bps rate hike in the policy rate (to 6.50%) and the FASBI deposit rate (to 4.50%) is expected.

Here's more:

We have argued for some time that monetary policy responses are required to ensure external and internal economic stability.

Internally, the adjustment in subsidized fuel prices has already impacted on headline inflation. Notably, the figure coming in at 5.9% YoY in June and likely to breach 7% in July when the full impact of the price adjustment takes place.

There is a need to anchor inflation expectations and limit second round price increases in the immediate few months. Externally, concerns about external account stability have been mounting and this has been reflected in the weakening rupiah over the past few months.

Amid depressed commodity prices, the current account deficit has stayed wide and financing has proven to be more challenging amid the period of risk aversion in May and June. On this front, policy actions (rate hikes) also need to be taken to restore confidence, especially given the USD 7bn fall in foreign reserves in July.

Therefore, further monetary tightening appears to be the logical course of action even if this implies a slower GDP growth trajectory. We maintain that BI’s tightening bias is likely to be maintained in the coming months.