Bank of Indonesia keeps rates on hold in February

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Indonesia’s central bank voted to keep its main interest rate unchanged this month, adding that it was adopting a “cautiously accommodative” stance on monetary policy this year.

Policymakers opted to keep the country’s seven day repo rate on hold at 4.75 per cent, in line with expectations.

Indonesia’s economic growth slowed at the end of last year, coming in at a quarterly pace of 4.9 per cent – its weakest in three quarters.

Like many major emerging markets, Indonesia’s growth and inflation fortunes are tightly linked to developments in the US. The Federal Reserve is poised to hike rates twice this year, which can push up the dollar and weaken the rupiah, potentially adding to inflationary pressures.

Oliver Jones at Capital Economics said he expects the BoI to keep rates unchanged throughout 2017, marking a temporary end to a easing cycle that saw six rate cuts in 2016.

“Worries about inflation will prevent the central bank from loosening policy any further over the rest”, said Mr Jones, adding:

Last year’s benign backdrop of falling inflation, which allowed BI to cut rates six times, is unlikely to be repeated.

Inflation jumped from 3.0% y/y in December to 3.5% in January, and we expect it to rise to the top of BI’s 3-5% target range by the end of the year.

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