Flash Notes

Bank Indonesia (BI) left its benchmark 7-day reverse repo rate at 4.75% for the second consecutive month. The overnight lendingfacility rate and deposit facility rate were also unchanged at 5.50% and 4.00% respectively. 20 out of 21 polled by Bloomberg hadexpected the rate decision today.

    We believe the BI has reached the end of its easing cycle after 150 bps cut in 2016 and with the US Fed poised to acceleratetheir pace of rate hike next year. On the contrary, there is some risk that BI could move to raise interest rates in the later part of2017 if inflation becomes more material. Headline inflation has recovered from 7-year low. In our baseline scenario, inflation isexpected to inch higher to average 4.0% in 2017 (2016: 3.6%) which is still well-within BI’s target range of 3-5%. The upside riskto 2017 inflation is expected to come mainly from the electricity tariff increases (to be raised over three times) and global energyprices.

    For growth, we believe higher oil and commodity prices should bode well for the overall economy. Private consumption demandwill be the backbone of Indonesia’s growth and reflation should be positive. We are maintaining our 2016 and 2017 growthforecast at 5.0% and 5.2% respectively while BI expects 5.0-5.4% expansion in 2017. The steady growth outlook should alsoreduce the need for further monetary easing next year.