Flash Notes

As widely expected, Bank Indonesia (BI) left its benchmark 7-day reverse repo rate unchanged at 4.75% for the fourthconsecutive month today. The central bank said that the room for monetary easing is “not too wide” from here.

    We maintain our call for BI to stay on hold through 1H17 while managing liquidity at banks as it said it is considering measures formore efficient reserve ratio. Our call takes into consideration of: (i) steady growth outlook for Indonesia; (ii) higher domesticinflation and (iii) 2-3 interest rate hikes in the US this year.

    In Jan, Indonesia’s exports jumped by 27.7% y/y (Dec: 16.0%) as it registered the fourth straight month of positive growth whileimports of capital goods displayed nascent signs of stabilization. The data further reinforces expectation of a steady economicoutlook and therefore less need to ease monetary policy further. BI sees improving growth and economic stability in 2017 withgrowth in the mid-to-low 5.0-5.4% range, in line with our 5.2% forecast.

    The rise in domestic inflation will be the key challenge for the central bank. Indonesia’s headline inflation surged to 3.49% y/y inJan from 3.02% in the preceding month following the electricity tariff increase. We see a chance that BI could move to raiseinterest rates in the later part of 2017 if inflation risk becomes more material, although the central bank is likely to be unwilling toreact to policy-induced inflation. We expect 2017 headline inflation to average 4.2% (2016: 3.5%) with year-end inflation at the topend of BI’s target range at around 4.5-5.0%. The upside risk to 2017 inflation is expected to come mainly from the plannedelectricity tariff increases (two more hikes this year), volatile food prices and commodity prices.