Bank Indonesia’s (BI’s) next monetary policy meeting is scheduled for 19 May. The central bank is expected to cut the BI rate 25bps to 7.25%, but keep the overnight deposit facility (FASBI) rate unchanged at 5.50%. Based on Indonesia’s narrowing current account (C/A) deficit in Q1-2015 and the lack of significant inflationary pressures. BI expects the C/A deficit to narrow to 1.6% of nominal GDP in Q1-2015 from 2.8% in Q4-2014, and inflation to remain within BI’s target range of 4-6% by year-end. Recent comments by government officials also indicate the government’s bias towards monetary policy easing to spur real GDP growth (4.7% y/y in Q1-2015, below market consensus). A BI policy rate cut will likely be a sharp negative for the Indonesian rupiah (IDR). The previous surprise BI rate cut in February pushed USD-IDR c.4% higher in the subsequent one-month period. “We maintain our view of continued IDR weakness in the short term”, said Standard Chartered in a report on Friday.
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