MACROECONOMIC ANALYSIS SERIES. BI Board of Governor Meeting, December 2017

Inflation in November virtually confirms that FY 2017 inflation will remain well below 3.50% range and will be close to 3.0-3.2%. Nevertheless, we see inflation to stabilize and 2018 inflation to remain within BI’s goal of 3.5±1%, given the signs towards stronger household consumption in 2018. As major central banks, such as the Fed, ECB, and Bank of Japan started to normalize their monetary policy and reduce the size of their balance sheet,  we expect some degree of selloff in emerging market assets, although the overall impact on Indonesia may not be as severe as in 2015. Bank  Indonesia have ample foreign reserves to defend Rupiah and Indonesian fundamental remains more robust than in 2015, so that risks of capital  outflow should remain manageable. With risks of lower-than-expected inflation and capital flow to remain low in coming months, Bank Indonesia  should hold its policy rate for now.

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