Bank Indonesia to focus on financial system stability

Will the tight policy bias remain?

According to DBS, Bank Indonesia (BI) is expected to keep policy rates steady at 7.50% this week. Recent data have been rather poor and this week’s trade data will only emphasize that domestic demand remains weak.

While the trade balance may post a surplus of circa USD 0.7bn in May, it comes on the back of poor import growth more than anything else. 

Here's more from DBS:

Private consumption stays relatively strong at 5% trend, but it has been shouldering a lot more responsibilities to support overall GDP growth. Export growth is weak, investment is sluggish and fiscal policy has been disappointing. It remains to be seen if the government were to accelerate its fiscal spending in 2H15, as promised. Up until May, fiscal spending is running at about 30% of full-year target. 

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. The central bank has been tolerant of a weaker rupiah. At the same time, however, sentiment among business owners is also being weighed by the weak rupiah.

Lowering the policy rate may help to boost loan growth marginally. That said, there is a risk is that it may backfire if it would only drag the rupiah even softer, making it less likely that businesses will demand new loans. 

Focusing on financial system stability is the central bank’s new mantra. Let’s not forget that there are also lingering concerns over inflationary expectations and external financing risks. Considering all these, it is not hard to see why BI will maintain its tight policy bias for now.