JAKARTA: Bank of America Merrill Lynch expects Bank Indonesia to keep the policy benchmark interest rate at the level of 5.75% for the time following the uncertainty over rising fuel prices and inflation.
Chua Hak Bin, Head of Emerging Asia Economics Global Research Bank of America Merrill Lynch said the average inflation during the year could reach 5.7% in case of rising fuel prices in June, or 4.7% if there is an adjustment.
"The first choice if you want to do a better monetary tightening is supposedly done by increasing reserve requirement and narrowing the interest rate corridor, so deposit facility rate (FASBI) becomes higher , rather than an increase in BI Rate ," he told Bisnis today, 8 May 2012.
He also considered that there is a possibility for Bank Indonesia (BI) to raise the reserve requirements (GWM) to 10% from 8% on May 10, 2012.
Chua also said the current subsidy cut plan have not yet found a bright spot as it still has many obstacles in the implementation. He considered the fiscal deficit could be widen to 3.2% of GDP, above the forecast of 2.2%, if fuel remains highly subsidized as it is today.
According to him, Indonesia's economic growth will also experience a slowdown to 6% this year from 6.5% last year. The forecast is below the government estimation which was set in a range of 6.3% - 6.7%.
The growth will be largely driven by investment which will reach 9.9% and government consumption of 5.9%. Meanwhile, household spending will slow to 4.9% and exports will be 7.8%. Yet, domestic demand will be resilient by growing 6.4% compared with the same quarter last year.
Likewise, Chua continued, the government must be stronger to absorb the budget and make investments to support the overall growth. (T03/aph)