As expected, Bank Indonesia (BI) left the policy rate unchanged at 4.25% with little change to its narrative. It maintained the 2018 GDP growth projection at 5.1% – 5.5%, inflation in the target range of 3.0% – 3.5% and the current account deficit at 2.5% – 4.5% of GDP.

We foresee BI to stay neutral on its monetary policy for 2018, holding the policy rate at 4.25% to ensure there is stability in the financial market with the US Fed still on a rate hike policy and noises of trade war.

• In line with our expectation, Bank Indonesia (BI) left the policy rate unchanged at 4.25%. There was little change to BI’s narrative. It maintained the 2018 GDP growth projection at 5.1% – 5.5%, inflation in the target range of 3.0% – 3.5% and the current account deficit at 2.5% – 4.5% of GDP.

• Credit grew 7.9% y/y in the first two months of 2018 is far below the official target of 10-12%. Besides, inflation in 1Q2018 averaged 3.3% y/y is below the mid-point target range of 2.5-4.5% set by BI while GDP grew slightly above 5% y/y.

• We believe BI will stay neutral on its monetary policy for 2018. Foreign holding exposure in the local bond is around 39.8% as of December 2017 while net outflow of foreign funds from the equities is about US$2.0bil year to date. With the US Fed expected to raise rates in 2018 added with trade war noises, BI will need to ensure there is stability in the financial market.

• Besides, inflation could gradually pick up from: (1) firmer commodity prices; (2) weak rupiah,;(3) improving domestic demand with a rising household incomes that will support private consumption and public infrastructure investment expected to expand further.

Source: AmInvest Research - 20 Apr 2018