Bank Indonesia can keep the benchmark 7-Day Repo Rate at 4.25 percent (where it has been since September 2017) as the country's inflation has been under control (at 3.25 percent y/y in January 2018), while the Indonesian rupiah has remained stable despite some recent pressures (caused by the improving outlook for the US economy that leads to rising expectations of a Fed Funds Rate hike in March 2018).

By 11:00 am local Jakarta time on Thursday (15/02) the Indonesian rupiah had appreciated 0.49 percent to IDR 13,562 per US dollar (Bloomberg Dollar Index). It is assumed that Bank Indonesia is comfortable with a rupiah in the range of IDR 13,450 - 13,650 per US dollar and therefore will not need to adjust its monetary policy to support the rupiah at this moment.

Although Bank Indonesia has drastically cut its benchmark interest rate between late-2015 and September 2017, this approach is yet to boost credit growth in Southeast Asia's largest economy. Bleak credit growth in Indonesia is attributed to stagnating economic growth around the 5 percent (y/y) mark and consumers' careful behavior (reflected by bleak household consumption growth).

Later this year, however, Bank Indonesia is expected to raise its key interest rate due to looming rising pressures. Indonesia's central bank is not expected to adjust its monetary policy in response to a Fed Funds Rate hike in March 2018. However, another Fed Funds Rate hike in June 2018 could give rise to more pressures and capital outflows from emerging markets, including Indonesia. The Federal Reserve could raise its key rate three times in 2018 (March, June, and December).