Indonesia Holds Key Rate Steady at 6.75%

Indonesia's central bank kept its benchmark interest rate on hold at 6.75 percent at its April 21st meeting, as expected, after three rate cuts in a row so far this year. Policymakers said the decision was in line with efforts to achieve the 2016 inflation target of 4±1% and support domestic economic recovery, amid weak global economic growth. Bank Indonesia also left its overnight deposit facility rate and lending facility rate unchanged at 4.75 percent and 7.25 percent respectively.
Bank Indonesia | Yekaterina Guchshina | 4/21/2016 11:52:34 AM
Excerpt from the statement by the Bank Indonesia:

Bank Indonesia will continue efforts to strengthen monetary operations framework through a consistent implementation of the term structure of monetary operations. Furthermore, Bank Indonesia will continue to strengthen policy coordination with the Government to control inflation, catalyse growth and accelerate structural reforms, thereby supporting sustainable economic growth moving forward.

Domestic economic growth was projected to accelerate in the first quarter of 2016 with the momentum maintained into the second quarter on the back of more fiscal stimuli. Government consumption and investment were expected to drive the economy in Q1/2016, as public capital spending and procurement increased significantly due to the implementation of various infrastructure projects. Private investment is also expected to improve on Q2-2016.

The first quarter trade surplus was consistent with the projected current account deficit in the same period. Foreign capital flowed on to financial markets in Indonesia through to March 2016, totalling USD3.7 billion and primarily targeting SUN instruments. Foreign investors continued to buy domestic stocks in March as the national economic outlook improved. 

The rupiah appreciated due to the maintained inflow of foreign capital coupled with an increase in the supply of domestic corporate foreign exchange. In March 2016, the rupiah appreciated 3.96% (ytd) to close at a level of Rp13,260 per USD. On the home front, investor perception of a promising domestic economic outlook, stemming from a reduction to the BI Rate and government policy packages aimed at improving the investment climate along with the accelerated implementation of infrastructure projects, helped to drive rupiah appreciation. Externally, less intense risks on global financial markets in line with the dovish statement relayed by the Federal Reserve coupled with a continually loose monetary policy in several advanced countries supported the strong rupiah. 

Financial system stability was maintained, underpinned by a resilient banking system and relatively sounder financial markets. In February 2016, the Capital Adequacy Ratio (CAR) stood at 21.7%, while non-performing loans (NPL) were recorded at 2.9% (gross) or 1.5% (net). In terms of the intermediation function, credit growth was noted to decelerate from 9.6% (yoy) the month earlier to 8.2% (yoy). In contrast, deposit growth was relatively steady, from 6.8% (yoy) last month to 6.9% (yoy). On the other hand, the looser monetary policy, in the form of a lower BI Rate and primary reserve requirement, has transmitted to increased liquidity and lower bank interest rates. This is expected to enhance the effectiveness of monetary policy in enhancing credit growth.

Indonesia Holds Key Rate Steady at 6.75%