Indonesia Leaves Monetary Policy Unchanged

Indonesia's central bank kept its benchmark interest rate on hold at 6.75 percent for the second straight meeting on May 19th 2016. The decision came in line with market expectations after three rate cuts in a row so far this year. 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 | 5/19/2016 12:58:20 PM
Excerpt from the statement by the Bank Indonesia:

Bank Indonesia considers the macroeconomic stability to be well maintained, as reflected by the inflation rate that remains within the target range of 4+1%, an improving current account deficit, and a relatively stable exchange rate. Monetary transmissions through the interest rate is improving, so are the preparations to implement the policy rate reformulation. (In April, Bank Indonesia announced that on August 19th, it will stop using its current 12-month benchmark and instead use the 7-day reverse repo rate, that stays at 5.5 percent). Provided that the macroeconomic stability maintained in a stable condition, rooms for monetary easing that has been opened may be used at an earlier time. Furthermore, Bank Indonesia will constantly increase the intensity of policy coordination with the Government, to support economic sustainable growth by strengthening growth stimuli and accelerating structural reforms, thereby supporting sustainable economic growth while controlling inflation.

Domestic economic growth in the first quarter of 2016 was lower than expected, and predicted to rebound in the subsequent periods. Growth was recorded at 4.92% (yoy), attributed to limited growth of government consumption and private investment, amid the acceleration of government capital spending. Conversely, household consumption maintained robust growth on the back of stable prices. Externally, export performance improved, along with improvements in several commodities. Economic moderation was felt in nearly all regions of Indonesia during the first quarter of 2016. Bank Indonesia projects economic growth to rebound in the upcoming periods, propped up by expanded and optimised fiscal stimuli linked specifically to accelerated infrastructure project development. Meanwhile, household consumption is also forecasted to gain momentum in line with mitigated inflation and higher income expectations. Congruously, the Government will also ramp up implementation of its recent policy package to boost competitiveness and enhance the investment climate, while a looser monetary policy stance should boost investment and exports. Consequently, robust economic growth is projected for 2016 in the range of 5.0-5.4% (yoy), which is down slightly from the previous projection of 5.2-5.6% (yoy).

The current account deficit narrowed in the first quarter of 2016, buoyed by a growing trade surplus. The current account deficit stood at 2.1% of GDP in the reporting period, down from 2.4% of GDP last quarter. A larger non-oil and gas trade surplus due to fewer non-oil and gas imports in line with limited domestic demand contributed to the narrower current account deficit. In general, non-oil and gas exports declined but shipments of several non-oil and gas commodities began to pick up. 

The rupiah remains stable. In the first quarter of 2016, the rupiah gained 3.96% (ptp) to close at a level of Rp13,260 per USD. Furthermore, the momentum was maintained into April 2016, appreciating 0.55% (ptp) to a level of Rp13,188 per USD. Domestically, the rupiah appreciated on the positive perception held by investors concerning the auspicious domestic economic outlook in line with maintained macroeconomic stability and optimism surrounding future economic growth. Such conditions are consistent with the lower BI Rate and government policy package to improve the investment climate, together with the accelerated implementation of infrastructure projects. 

Low inflation was still observed in the reporting period, and expected to remain within the 2016 inflation target of 4±1%. The Consumer Price Index (CPI) recorded deflation of 0.45% (mtm) or 3.60% (yoy) in April 2016, stemming from administered prices and volatile food. 

Indonesia Leaves Monetary Policy Unchanged