Flash Notes-Indonesia: Bank Indonesia Maintains Interest Rate

Bank Indonesia (BI) kept its policy rate unchanged at 7.50% today in line with consensus and our expectation. Similarly,the overnight deposit facility (FASBI) rate was kept at 5.50%. Despite the slowdown in growth, we believe that BI haslittle room to cut its interest rates further in the short-term after the surprise 25 bps rate reduction in February.

    The headline inflation rate edged higher to 7.15% y/y in May from 6.79% y/y in April and is likely to remain at around7.0% in the next few months. We may see some upward price pressure through Ramadan but inflation will drop in4Q15 due to a high base effect.

    Against the backdrop of rate normalization expectation in the US later this year and the depreciation pressure on theIDR, we expect BI to maintain its policy rate unchanged at 7.50% for the upcoming meetings.

    BI has lowered its 2015 growth forecast to 5.0-5.4% from 5.4-5.8% previously. Our growth forecast at 5.0% is at the lowerend of the revised estimates. Domestically, growth outlook remains downbeat after Indonesia turned in its slowestgrowth pace since 2009 at 4.71% y/y in 1Q15 (4Q14: 5.01%). 2Q15 growth is likely to remain below 5.0%.With softcommodity outlook, private consumption which accounts for around 56% of GDP will be the key growth driver ahead.

    The government has only disbursed about 31% of its spending target through end-May and is expected to acceleratespending in the second half of the year in order to push up the growth rate. This should improve outlook in 2H15 andbring the full-year growth to around 5.0%.

    USD/IDR surged to a fresh 17-year high in June on the back of rate normalization expectation in the US which wascompounded by domestic growth concerns and seasonal USD demand for debt payments. The eventual rate lift-offin the US supports higher USD/IDR but a more gradual pace of rate hike will likely reduce the upward trajectory in thepair. We expect USD/IDR at 13,500 and 13,600 at end-3Q15 and end-4Q15 respectively. Soft commodity outlook couldfurther weigh on the currency.