2017.10.2309:27:00UTC+00Bank Indonesia Likely To Cut Rates Early Next Year: Capital Economics

Bank Indonesia is likely to consider interest rate cuts most probably early next year, as inflationary pressures are under control but the economy continues to struggle, Gareth Leather, an economist at Capital Economics, said.

The central bank decided to retain its seven-day reverse repurchase rate at 4.25 percent on October 19.

The bank had cut interest rates by 25 basis points in each of its last two meetings.

However, the decision probably represents a pause in the bank's easing cycle, rather than a halt, the economist observed.

"Looking ahead, we think the central bank will resume its cutting cycle soon," Leather anticipated.

The struggling nature of Indonesia's economy in the past two years, is certainly in need of further support.

But, subdued commodity prices, a weak fiscal position and slow progress on reform, mean a sustained recovery is not on the cards, the economist said.

Based on these, Capital Economics expects growth to remain stuck at around 5.0 percent over the next couple of years.

"Meanwhile, the central bank has little to worry about on the inflation front," the economist noted.

Headline inflation fell from a high of 4.4 percent in June to 3.7 percent last month and is now in the bottom half of BI's 3-5 percent inflation target.

Furthermore, subdued economic growth and low global energy inflation should both help to keep a lid on inflationary pressures over the coming months.

"Probably the main reason BI did not cut interest rates again today was the recent weakness of the rupiah," Leather pointed out.

In its statement, Bank Indonesia said it remains cautious about "monetary policy tightening and fiscal reforms in the US", suggesting that the timing of further rate cuts will be determined by the performance of the currency.

In short, the recent monetary policy meeting is unlikely to mark the end of the recent easing cycle, but expect further easing, most likely next year, Capital Economics predicted.