Bank Indonesia (BI) is almost certain to keep its reference rate at 6.5% on Tuesday. GDP growth remains strong but the economy is expanding close to its trend rate of 6% pa rather than at a faster pace. In addition, the annual gain in consumer prices has slowed due to lower food inflation at a time when the soaring rupiah is holding down import costs. Nevertheless, the tightening strategy adopted by BI is potentially dangerous and demand-side inflation pressures will climb at some point. The reference rate at 6.5% looks to be on borrowed time.
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