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Aldian Taloputra, Senior Economist at Standard Chartered, points out that Bank Indonesia (BI) announced that it will hold an ad hoc policy meeting on 30 May, ahead of the next scheduled monthly meeting on 27-28 June and they expect BI to hike the policy rate by 25bps to 4.75%, ahead of the US Fed’s expected hike at its June meeting.

Key Quotes

“We now forecast the policy rate at 4.75% at both end-2018 and end-2019, versus 4.5% previously. The expected hike this week is in line with new BI Governor Perry Warjioyo’s statement that monetary policy will be set pre-emptively.”

“The market reacted positively to the announcement. USD-IDR dipped slightly below 14,000, the 10Y IDR bond yield fell 20bps to around 7.2%, and the local stock market rose 1.3% to 6,053 in the morning session, the strongest performance in the region.”

“We expect BI to maintain a hawkish tone in its policy guidance and keep its options open, standing ready to adjust policy if upcoming data releases warrant it. BI is also considering relaxing macro-prudential measures on property-sector financing to help offset the impact of higher rates on growth.”

“In addition to IDR stability, we think BI will be watchful of the inflationary impact of higher oil prices and a weak IDR, and the recent spike in the trade deficit. Continuing deterioration in the current account (C/A) deficit could raise the risk of further tightening. We will closely watch BI’s macroeconomic assessment. Given our view that inflation pass-through and the C/A deficit will be manageable, we still think the current rate-hiking cycle will be limited compared to 2013, when rate hikes were partly aimed at containing a large C/A deficit.”