Indonesia monetary easing unlikely

The central bank's policy rate is forecast to remain at 5.75%.

DBS Group Research noted:

The central bank (BI) is expected to keep the policy rate unchanged at 5.75% today. Slowing headline GDP growth does not imply that BI will embark on monetary easing. In fact, the outperformance of the domestic economy relative to the rest of the world has resulted in stress being placed on the external accounts even though inflation has stayed low.

This has been reflected in the sharp deterioration in the current account balance from an annual surplus position in 2011 to a projected deficit amounting to 2% of GDP for 2012. To be sure, part of this has been exacerbated by depressed commodity prices which impacted on the trade balance. However, even after factoring in a mild updrift in commodity prices in the coming quarters, a return to current account surplus is unlikely for 2013.

Other indicators also bear watching. QE3 may have improved sentiment somewhat, but foreign reserves have yet to show a sustained trend of accumulation in recent months. Notably, the IDR still has a depreciatory trend against the USD. BI is likely to maintain a mild tightening bias over the medium term, making occasional adjustments to the FASBI deposit rate.

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