Indonesia Lowers Key Rate to 7%


Indonesia's central bank decided to cut its benchmark interest rate by 25 basis points to 7.0 percent at its February 18th meeting. It is the second rate adjustment so far this year, as policymakers seek to support the weak economy and inflationary pressures eased. Bank Indonesia also slashed its overnight deposit facility rate and lending facility rate by 25 basis points to 5.0 percent and 7.5 percent respectively, and reserve requirement ratio by 100 basis points to 6.5 percent.

Excerpt from the statement by the Bank Indonesia:

The move is consistent with greater room to ease monetary policy on the back of solid macroeconomic stability, especially in terms of less intense inflationary pressures in 2016 as well as less uncertain global financial markets. The dual policy of lowering the BI Rate and primary reserve requirement is is expected to strengthen efforts to boost the ongoing economic growth. In addition, Bank Indonesia will continue to strengthen coordination with the Government to control inflation, bolster growth stimuli and accelerate structural reforms, thereby supporting sustainable economic growth moving forward, while maintaining macroeconomic stability.

Economic growth in Q4/2015 stood at 5.04% (yoy), up from 4.74% (yoy) in the previous period. The government contributed to stronger growth in terms of consumption and infrastructure investment along with local elections contested nationwide. On the other hand, the role of the private sector remained limited, with sluggish consumption and non-construction investment reported. Externally, the export slump persisted in line with the global economic slowdown and sliding international commodity prices. By sector, economic imbalances remained, with the construction sector supporting growth due to infrastructure development along with the services sector. Growth in 2016 is projected in the 5.2-5.6% (yoy) range, supported by fiscal stimuli in the form of accelerated infrastructure project development. Furthermore, private investment is expected to pick up after recent government deregulation and greater room to ease monetary policy while maintaining macroeconomic stability.

The Indonesia Balance of Payments (BOP) improved in Q4/2015, underpinned by an increase in capital and financial account surplus. The capital and financial account surplus was boosted by an increase in foreign capital inflow, along with the decreased global economic uncertainty and improved confidence on Indonesia’s economic prospect. Consequently, the yearly 2015 current account deficit stood at 2.06% of GDP, much lower than that of 2014, which stood at 3.09% of GDP.  Moving forward, Bank Indonesia believes that the BOP will improve along with the manageable current account deficit of under 3% of GDP.

The rupiah was stable and tracked an upward trend on the back of foreign capital inflow, as uncertainty eased on global financial markets and confidence in the domestic economic outlook was restored. In Q4/2015, the rupiah appreciated 6.27% (ptp – point to point) to a level of Rp13,785 per USD. Furthermore, rupiah appreciation persisted into January 2016, with the currency climbing 0.1% (ptp) to close at a level of Rp13,775 per USD at the end of the month. Rupiah appreciation was bolstered by an influx of foreign capital to government securities in line with favourable investor perception of domestic economic fundamentals due to the lower BI rate, government policy packages aimed at improving investment climate, and an increasingly effective implementation of various infrastructure projects. In addition, less risk on global financial markets, reflecting a more dovish FFR path, also drove rupiah appreciation. 

Inflation fell in January 2016, thereby supporting achievement of the inflation target in 2016, namely 4.0±1%. Looking forward, the sliding global price of oil is expected to lower pressures on inflation. Bank Indonesia confirmed that inflation will be controlled in the middle of the 4.0±1% range throughout 2016.

Indonesia Lowers Key Rate to 7%


Yekaterina Guchshina | yekaterina@tradingeconomics.com
2/18/2016 10:01:30 AM