Mandiri Sekuritas BI may loosen its monetary policy if inflation continues to decline

􀂄 Bank Indonesia could lower its policy rate stance that currently stood up at 6.5% should inflation continue to decline according to BI Deputy Governor Hartadi A Sarwono. Currently, BI sees 2010 inflation to come at the lower end of its inflation target of 5% ± 1%.

􀂄 We think the inflationary pressure would likely increase in the second half of the year, as demand recovers and government plan to increase administered prices. Thus, lowering BI rate would fuel inflation to pick up stronger and may reverse rupiah appreciation which, in the first place, has help keeping the inflation low.

􀂄 We maintain our view that the BI rate will increase in 2H10 by around 75bps to 7.25%.