We are observing an interesting change in Bank Indonesia’s (BI) March statement, as the central bank is now eyeing higher global inflation alongside an anticipated economic recovery.

BI maintains its positive tone in global growth as the central bank’s board of governors stated that, “The global economy continued to post positive growth on the back of the United States’ and emerging markets’ economic gains, as well as rising commodity prices.”

Latest data indicated US inflation is already at 2.5 percent while European Union inflation improved when the European Central Bank cut the amount of economic stimulus. Hence, we see a trend of divergence of global monetary policy coming to an end and this will likely weigh on US dollar movements toward major and emerging market currencies.

At this stage, we see the rising global inflation as a thing that policymakers do not need to be worried about. The increasing inflation rate, instead, signifies an economic recovery around the globe that will benefit Indonesia’s economy sooner or later. Positive growth in export and import data has confirmed this view.

Currently, we see that there is a low possibility of BI’s policy reversal to a tightening mode as the external balance has improved and the rupiah’s stability prevents inflation from soaring in the immediate future. If stability can be maintained throughout this year, BI tightening will likely start in 2018 together with full economic recovery and the demand-pull inflation phenomenon.

The central bank suggested that economic growth in the first quarter of 2017 would be better compared to in the previous quarter, while market interest rates already dropped by 1.28 percent year-on-year (yoy) and by 0.8 percent yoy in lending.

After the US Federal Reserve’s rate hike, the sentiment in the Indonesian financial market appears to be positive, with rallies in bonds, equities and currencies, as the Fed introduced a more dovish tone than what market had previously expected.

Going forward, we see positive sentiments likely to come from a possible investing rating upgrade from rating agency Standard & Poor’s (S&P) and a better-than-expected current account balance level in the first quarter of this year.

Meanwhile, risks for financial markets in a three-month perspective would likely come from the level of domestic political stability and unexpected moves by major central banks.
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The writer is an economist at Bahana Sekuritas

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