MACROECONOMIC ANALYSIS SERIES. BI Board of Governor Meeting, February 2018

Better-than-expected US employment figures and strong GDP growth have raised concern among market participants of faster pace of interest rate  hike in the US in 2018, which led  to portfolio capital outflow from emerging market and riskier assets in the last month. As US labor market will  remain tight, which pushes wage and inflation higher, we expect downward pressure on Rupiah to continue in the next few months. Bank Indonesia,  on the other hand, still faces weak domestic demand, as evidenced by below-5% consumption growth in Q4 2017 and record-low core inflation. Given the prospect of stubbornly low core inflation for the rest of 2018, Bank Indonesia may want to hold its policy rate for now, even in the face of  increasing external pressure to increase interest rate.

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