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Bank Indonesia (BI) is expected not to change the benchmark interest rate in the near-term; rather continue to watch financial market developments very closely in the coming months. In the meantime, the central bank can be expected to continue to build up its foreign reserves, which further allows it to dampen the impact of inflows and outflows, in a bid to manage the rupiah moves.
Bank Indonesia (BI) kept interest rates unchanged on Thursday. While its policy stance is now said to be biased towards neutral (rather than accommodative), the tone of the policy statement was a tad more dovish as compared to that in March.
There was less of an emphasis on the upward trend in inflation, although the central bank did warn on the seasonal pressures ahead of the Ramadan. On the GDP growth outlook, BI indicated that consolidation in the private sector has been sustained, and likely to have remained a drag on growth momentum in 1Q17.
Encouragingly, the BI was a little more optimistic on investment growth this time around. Non-construction investment growth is seen to have picked up, and this much should have been visible from the strong import growth recorded in March.
"The central bank has been tolerant of gradual trade-weighted currency appreciation. Raising the key 7-day reverse repo rate later this year may be necessary if the Federal Reserve sticks with its plan to normalize interest rates in 2017 and 2018," DBS Group Research commented in its latest report.
