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Investing.com -- UBS now anticipates Bank Indonesia will lower its policy rate to 5.25% at its upcoming meeting on June 18, following a 25-basis-point cut last month. The financial services firm believes Indonesia’s interest rates remain "firmly in restrictive territory."
The bank points to economic indicators showing real policy rates around the 80th percentile of their historical range, while GDP growth and inflation are running at the 20th percentile. With core inflation at 2.4%, headline inflation at 1.6%, and GDP deflator at 2.1% year-over-year, UBS argues interest rates are "still a long way from neutral."
UBS cites four key reasons for expecting an earlier rate cut. First, delaying action could result in a "higher sacrifice ratio for growth" given monetary policy lags and current weak demand. Second, cutting now may involve "fewer trade-offs" due to "benign financial conditions and stable FX."
The firm’s third rationale suggests a June cut would align with Bank Indonesia’s communication strategy of "opportunistic easing" without signaling undue concern about growth. Finally, UBS notes that consecutive rate cuts are common in Bank Indonesia’s history, with 75% of cuts since 2016 occurring as part of a consecutive series.
The currency has remained stable amid increased bond inflows and U.S. dollar weakness, according to UBS, creating favorable conditions for monetary easing.
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