BI Rate remains unchanged

BI Rate remains unchanged, higher concern on inflation expectation.

No change on the policy rates. As we have expected, BI rate and FASBI rates were unchanged at 5.75% and 4.00%, respectively, in today’s board of governor meeting.

Inflation remains the key issue. Bank Indonesia maintained its focus on inflation especially considering potential risk of inflation expectation owing to the uncertainty over the government’s fuel subsidy policy. That said, the central bank will continue to absorb liquidity through its longer term instruments to restrain short term inflationary risk. At the same time, such strategy is also meant to maintain the rupiah’s volatility and to fine tune money market internationally.

External imbalance improvement is seen in 1Q13. The central bank highlighted that 1Q13 current account deficit has fallen to 2.4% of GDP from 3.6% in 4Q12 and 2.8% of GDP in FY12, respectively. The reason is sharp decrease in imports at a time when non-oil and gas export remained positive. A more detailed balance of payment data will be released tomorrow.

International reserve increased to US$107.3bn in Apr13 from US$104.8bn in Mar13. The current reserve is equivalent to 5.8 months payment of imports and government’s foreign debt service. Basically, we have expected this in our report last week (see Weekly Economic Research titled S&P downgraded Indonesian sovereign credit rating outlook on 2 May13).

Monetary policy will be more dynamic in 2H13. Until this moment, assuming no major change in subsidized fuel policy, we maintain our BI rate forecast of 5.75% until YE13 and an increase on FASBI rate by no less than 25bps to 4.25% the soonest in Jun13.  However, should the government increase subsidized fuel price, Bank Indonesia will definitely be more aggressive in attacking higher inflationary risk.

for Indonesia Market Summaries 15 May 2013