Indonesia Holds Key Interest Rate at 6%

Bank Indonesia kept its benchmark 7-day reverse repo rate unchanged at 6 percent on 21th March 2019, as widely expected. Policymakers said the decision was consistent with efforts to reduce the current account gap towards a range of 2.5% of GDP in 2019 and maintaining the attractiveness of domestic financial markets for foreign investors. The lending and the deposit facility rates were also left steady at 6.75 percent and 5.25 percent respectively. For 2019, the central bank expects Indonesia inflation below midpoint of 2.5-4.5 percent target range while GDP growth is projected between 5.0-5.4 percent.

Excerpts from the Bank Indonesia Press Release:

Interest rate and exchange rate policies will continue to focus on external stability as Bank Indonesia implements other accommodative policies to stimulate domestic demand as follows: Maintaining a monetary operations strategy oriented towards increasing available liquidity by regular and scheduled term-repo transactions in addition to FX Swaps; Strengthening accommodative macroprudential policy by raising the Macroprudential Intermediation Ratio (MIR) from 82-92% to 84-94% in order to bolster bank financing extended to the corporate sector; Accelerating financial market deepening policy by: (i) strengthening market conduct through mandatory treasury certification for market players; and (ii) encouraging hedging instruments against domestic interest rate fluctuations through regulations concerning Rupiah Interest Rate Swaps (IRS) and Overnight Index Swaps (OIS); and Strengthening payment system policy to support economic activities and financial inclusion.

Solid economic growth is predicted in the first quarter of 2019 on the back of domestic demand. Robust consumption growth is expected to endure, supported by maintained public purchasing power and consumer confidence, fiscal stimuli through social spending, as well as election spending. Investment has slowed slightly in the first quarter of 2019 in line with cyclical trends at the beginning of the year, yet investment growth is expected to regain momentum in subsequent periods due to infrastructure projects. Notwithstanding, the contribution of net exports has continued to decrease in line with global economic moderation and sliding commodity prices. Consequently, Bank Indonesia projects economic growth in 2019 on the range 5.0-5.4%.

Indonesia’s balance of payments (BOP) is expected to improved in the first quarter of 2019, thus bolstering external resilience. The position of reserve assets stood at USD123.3 billion at the end of February 2019, equivalent to 6.9 months of imports or 6.7 months of imports and servicing government external debt, which is well above the international standard of three months. Looking forward, policy synergy will constantly be improved in order to strengthen external resilience. Measures to stimulate exports and tourism as well as control imports will be maintained in 2019, thus maintaining the current account deficit within a manageable range of 2.5% of GDP. Furthermore, policy will also be directed towards attracting capital flows to offset the current account deficit.

The rupiah continues to appreciate as external sector performance improves. As of 19th March 2019, the rupiah strengthened 1.05% (ptp) or by an average of 0.85%, supported by a deluge of foreign capital inflows to the domestic financial markets. Bank Indonesia predicts rupiah stability in accordance with the currency’s fundamental value and maintained market mechanisms. To support exchange rate policy effectiveness and strengthen domestic financing, Bank Indonesia will accelerate financial market deepening efforts, targeting the money market and foreign exchange market.

Inflation is trending downwards and remains under control within the target corridor for 2019 at 3.5%±1% (yoy).

Indonesia Holds Key Interest Rate at 6%

Bank Indonesia l Chusnul Ch Manan |
3/21/2019 11:11:24 AM