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Indonesia Likely To Hold Rates This Year Despite Weak Growth Momentum

Bank Indonesia is likely to keep its policy rate unchanged at least until the end of this year, as policymakers view the stance as neutral, amid weaker growth, economists at Capital Economics said.

On Thursday, the central bank left its key interest rates unchanged at 4.75 percent for a ninth session in a row.

“A senior BI official has characterised the policy stance as neutral, which strengthens our conviction that rates will remain on hold for some time yet,” economists said.

The policy statement acknowledged that growth had been weaker in the second quarter than the bank had previously anticipated, economists observed.

Capital Economics expects that Indonesia’s growth will be around Q1’s 5.0 percent annual growth rate through this year and 2018.

“For this reason, the economy would benefit from interest rate cuts,” economists added.

The economy is still facing few tailwinds amid weak incoming activity data and slow credit growth, weak fiscal position and disappointing progress on reform.

But a rate cut is unlikely this year given the central bank’s concerns about inflation, economists noted.

The annual headline inflation in June still climbed to 4.4 percent, the highest it has been since March last year and nudging the top-end of Bank Indonesia’s 3-5 percent inflation target band.

The rise in inflation was mainly driven by higher prices for fuel owing to reduced government subsidies.

Although the rate of inflation will prove temporary, policymakers are unlikely to risk any damage to their reputation by cutting rates while inflation remains elevated, economists pointed out.

“All told, we continue to expect that the benchmark rate will be kept at 4.75 percent at least until the end of the year,” Capital Economics’ economists predicted.

“Further ahead, if inflation drops back as we expect in 2018 and worries about the exchange rate remain subdued, rate cuts could come back onto the agenda.”

The material has been provided by InstaForex Company – www.instaforex.com

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