Bank Indonesia Expected to Stick With 5 Percent Key Rate


OCTOBER 14, 2016

Jakarta. Economists expect Bank Indonesia, the country's central bank, to keep its benchmark rate at 5 percent in an announcement next week, after the relative success of the government's first tax amnesty period eased pressures on the monetary authority to provide boost to economic growth.

"We're now more unlikely to see a drastic slowdown in government spending toward the end of this year. Presumably, this means lower pressure on BI to do more than it has already done this year," Gundy Cahyadi, economist at the Singapore-based DBS Bank group research, said in a note on Thursday (13/10).

Slowing inflation in the first half of this year has allowed Bank Indonesia to cut its benchmark interest rate several times this year, in hopes the cuts would encourage business and household spending. The 7-day reverse repo rate, a new benchmark since July, now stands at 5 percent.

But, inflation started to pick up in September, advancing to 3.07 percent from 2.79 percent in August, its lowest since 2009.  "The outlook is clearly for higher inflation into 2017," Gundy said.

The tax amnesty program has provided the government with Rp 93 trillion in extra revenue this year, enough to keep the state budget deficit below 3 percent of the gross domestic product without a further cut in government spending, Gundy said.

Eric Sugandi, an economist with the Jakarta-based think tank Kenta Institute, said the central bank will keep the key rate steady as there is growing likelihood that the United States Federal Reserve may increase its benchmark rate in December.

However, Lana Soelistianingsih, an economist from Samuel Assets Management, said the central bank may lower the 7-day reverse repo rate by 25 basis points to 4.75 percent because loan disbursement has remained low.

Bank Indonesia projects credit growth for the whole year to reach around 7 percent to 9 percent, lower compared to last year's 10.1 percent. "If the Fed increases [its benchmark rate] in December, then it might be hard for BI to lower [its key rate]," she said.