Indonesia's central bank is expected to keep its benchmark interest rate unchanged at a policy meeting on Tuesday, as it guards against inflation and potentially more weakness in the rupiah.
While exports and consumption in Southeast Asia's largest economy remains sluggish, all 14 analysts in a Reuters poll expect Bank Indonesia to refrain from addressing weak economic momentum with a rate cut.
The central bank's key rate has been kept at 7.50% since its unexpected 25-basis-point cut in February as inflation has crept up and the rupiah remains under pressure.
"Volatility in the financial markets and especially the weak sentiment on the rupiah, means there is not much that BI can do at this juncture," said DBS economist Gundy Cahyadi. "It is not hard to see why BI will maintain its tight policy bias for now."
Annual inflation in June edged up to its highest this year at 7.26% due to rising demand with the start of Muslim fasting month. The rate is well above the central bank's target range of 3-5% in 2015.
Bank Indonesia hopes the rate will fall below 7% this month on cooling prices after Eid al-Fitr, the holiday at the end of the Muslim fasting month.
Meanwhile, the rupiah has been trading around 13,300 per dollar since last month, a level that BI said reflects the country's economic fundamentals, but is near its weakest level in 17 years.
Instead of using interest rates, BI has eased lending requirements to stimulate loan growth and revive economic activity, such as adjusting the loan-to-deposit-ratio rules to include banks' bonds, and encouraging banks to give out more mortgages, auto loans, and loans to small-medium-enterprises.
But HSBC's Su Sian Lim said those moves "are not likely to be broad or potent enough to materially boost credit and economic growth" and that BI itself has acknowledged year-on-year loan growth this year could be 11-13%, below an initial target of 15-17%.
Lim said another 25-basis-point cut this quarter was necessary to support growth, adding that economic momentum also hinges on whether infrastructure projects take off in the second half of 2015.
Other analysts in a Reuters poll gave mixed views on where interest rates were headed by the year-end.
Out of the four economists who gave forecasts, two expected more cuts, one forecasts a hold, and one saw BI raising rates in line with expected US interest rate increases. – Reuters, July 13, 2015.
original source: http://www.themalaysianinsider.com/business/article/indonesian-central-bank-to-keep-rates-steady-on-inflation-fx-concerns#sthash.3YL98ost.dpuf