Even as the markets are turning optimistic about BI easing monetary policy in the near-term, we maintain our view that the central bank will continue to remain cautious on policy rates and use other instruments to provide support.
May inflation edged up to one-year highs of 3.32% y/y – primarily on the back of pre-Ramadan demand pressures. Although this is still below the midpoint of the central bank’s target range of 2.5-4.5%, it should help to dampen expectations of a rate cut this month.
The re-appointment of President Joko Widodo (Jokowi) has ensured policy continuity, which along with the recent S&P ratings upgrade, is pointing to some domestic stability. As a result, the rupiah has been the top performer against the USD on the Asian currency board since the last BI meeting on May 20. However, the external environment has deteriorated once again, keeping the rupiah vulnerable.
The June G20 meetings will be a key catalyst for any progress on the U.S.-China trade talks. Additionally, markets are pricing high odds for easing at the Fed’s July meeting—scheduled for July 31.
As such, we expect BI to keep policy rate unchanged at 6.00% at the June 20 meeting with a neutral/cautious/data dependent stance. At the same time, accommodative macroprudential measures are likely to continue. Barring a significant de-escalation of the U.S.-China trade tensions, a large China stimulus or rate cuts by the Federal Reserve, we believe BI still has room to keep rates unchanged this year.