In a widely expected move, Bank Indonesia yesterday cut its policy rate (BI) by 25bp to 7.00%, the lowest since the rate was introduced in 2005. This meets our prediction as well as market expectations. BI sees signs of the global economy stabilising and has maintained its economic growth estimate of 3-4% for Indonesia this year, in line with our estimate of 3.5%. However, BI cautions that higher commodity prices could reignite inflationary pressure in 2010. While there is potential for further rate easing given fast-receding inflation, we believe BI is likely to end its cuts for now, allowing it to assess the impact of previous rate reductions on the real economy. As such, we continue to believe that 7% would be the optimal rate this year.
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