Indonesia: Monetary policy

5 min

Bank Indonesia (the central bank) kept its key policy interest rate unchanged at 4.25% at its last meeting on 19 April. The authorities considered that the current policy stance is appropriate to maintain both macroeconomic and financial stability, yet they acknowledged mounting external pressures, including rising oil prices, tighter monetary policy in the U.S. and risks related to U.S.-China trade frictions. Meanwhile, inflation has remained under control, at 3.4% y/y in March, comfortably within the inflation target band (+2.5% to +4.5%). Economic growth is improving but the pace is fragile: the manufacturing PMI eased to 50.7 points (still signaling expansion) in March, from a 20-month high of 51.4 in February. Going forward, we expect Bank Indonesia to maintain its policy rate unchanged until the end of this year as this would help consolidate the current growth momentum (we forecast real GDP to rise by +5.3% in 2018, after +5.1% in 2017). This would pave the way for a rate hike of +25bp in 2019.