Indonesia's policy rate to stay on hold

The central bank, says DBS, will be striking a balancing act between growth, inflation, outflows, and the rupiah.

DBS Group Research noted:

The central bank (BI) will keep its policy rate unchanged at 5.75% today.

In the current global environment of slowing growth, weak external demand and depressed commodity prices are likely to persist. Moreover, there remains an elevated threat of portfolio outflows in the event of another bout of risk aversion.

Accordingly, BI will be striking a balancing act between growth, inflation, outflows and the rupiah. Although there are downside risks to growth from the external front, room for further rate cuts has become constrained.

While it is true that inflation has thus far been manageable, BI also has to account for the country’s external imbalances. On the trade font, falling coal, rubber and palm oil balances have eroded the trade balance sharply. Coupled with resilient import growth, the trade balance registered deficits for April and May.

This also implies that the current account deficit for 2Q will likely worsen compared to 1Q. Financing of the current account deficit has become more of a concern in a situation where portfolio outflows and rupiah weakness are key risks.

In fact, BI has already acted to selectively tighten monetary policy to manage external imbalances and provide more stability to the rupiah. More steps (including the increasing of selected interest rates) could be taken in this direction in the coming months if needed.