JAKARTA: Bank Indonesia is expected to hold its benchmark interest rate at 7.50 percent on Thursday even though economic growth fell to its slowest pace in five years during the third quarter.
In July-September, gross domestic product expanded 5.01 percent on a yearly basis, continuing a slowing trend. The slowing stems partly from the central bank's tight monetary policy, which it began last year to contain inflation and the current account deficit and aid the rupiah.
All 15 analysts in a Reuters poll said Bank Indonesia (BI) will keep the benchmark rate at 7.50 percent, where it has been since November 2013, at its first policy meeting since Joko Widodo became president.
Widodo aims to get the annual growth rate up to 7 percent, but in the short-term the effort won't be aided by lower interest rates. Analysts expect policy to stay tight, due to expectations that US interest rates will rise in 2015 and Indonesia's new government soon might raise fuel prices - which would in turn increase the inflation rate.
Dian Ayu Yustina, an economist with Bank Danamon in Jakarta, said in a note that with weaker GDP data, the central bank will "prefer to avoid raise the BI rate even if the inflation is rising as a result of the upcoming fuel price hike". Two domestic think-tanks have forecast a 25 basis point rate increase in December if fuel prices are raised by then.
Edward Teather of UBS said BI might raise 25 or 50 basis points in the next year if fuel subsidies are cut as much as 3,000 rupiah (25 US cents) per litre, though the chance of that happening is diminishing with lower global oil prices In the long-run, Teather wrote on Monday, "it is more likely that the next BI policy rate decision will be a cut." He sees the benchmark rate being one percentage point lower by end of the 2016.
Most analysts expect BI to also keep its deposit facility rate, known as Fasbi, and lending facility rate at 5.75 percent and 7.50 percent respectively until end of this year.
Indonesia reported annual inflation of 4.83 percent in October, still within BI target range of 3.5 to 5.5 percent, and a trade deficit of $270 million for September.
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