Indonesia Holds New Key Rate at 5.25%

The Bank Indonesia left its new benchmark interest rate unchanged at 5.25 percent at its August 19th, 2016 meeting. The lending facility rate was also left unchanged at 4.5 percent but the overnight deposit facility rate was cut by 100 bps to 6 percent to narrow the corridor around the key interest rate. Policymakers officially adopted the 7-day reverse repo rate as the new benchmark, replacing the previous rate as earlier announced in April. The decision aims to improve the effectiveness of monetary policy transmission.
Bank Indonesia | Yekaterina Guchshina | 8/19/2016 3:59:12 PM
Excerpt from the statement by the Bank Indonesia:

The policy is in line with efforts to maintain macroeconomic stability, by keeping domestic economic growth momentum amid a sluggish against a backdrop of the ongoing global economic slowdown. Bank Indonesia believes that by maintaining macroeconomic stability, especially a controlled inflation within the target range, an improved current account deficit, and relatively stable exchange rate, rooms for monetary easing remains open.

Bank Indonesia will observe short-term domestic economic conditions and global economic developments, especially possible Fed Fund Rate hike. In addition, Bank Indonesia will constantly strengthen policy coordination with the Government in order to catalyse sustainable economic growth by accelerating structural reforms. Furthermore, Bank Indonesia will also continue to coordinate with the Government to prepare anticipative policy measures that ensure implementation of the Tax Amnesty will go smoothly and support government’s fiscal adjustment efforts.

The domestic economic growth accelerated in the second quarter of 2016 but remains uneven regionally and by sector. Economic growth in the reporting period was recorded at 5.18% (yoy), up from 4.91% (yoy) last quarter. Economic momentum was boosted by growing domestic demand in the form of government consumption and investment, as well as household consumption. Fiscal stimuli and the looser monetary policy stance have begun to show early signs of stimulating private and public consumption. Moving forward, however, Bank Indonesia predicts sustainable economic growth based on the looser monetary and macroprudential policy mix applied, coupled with the government’s policy packages. In contrast, a government less inclined to spend in the second half of the year could potentially undermine growth this year. Consequently, Bank Indonesia predicts economic growth in 2016 in the range of 4.9-5.3% (yoy), slightly down on the previous projection of 5.0-5.4% (yoy).

Rupiah appreciation continued in line with the promising domestic economic outlook and easing external risks. In the second quarter of 2016, the rupiah appreciated by an average of 1.59% to close at a level of Rp13,313 per USD. Rupiah momentum persisted into July 2016, gaining a further 1.72% to close at Rp13,112 per USD. Domestically, rupiah appreciation was supported by the encouraging domestic economic outlook in line with a maintained macroeconomic stability, alongside the recently enacted Tax Amnesty. In terms of the external sector, rupiah appreciation was driven by less risk on global financial markets due to the limited impact of the Brexit and the expected postponement of the next inevitable Federal Funds Rate (FFR) hike. Moving forward, Bank Indonesia will continue to maintain exchange rate stability in line with the rupiah’s fundamental value.

Low inflation was controlled within the target corridor for 2016 of 4±1%. CPI inflation was recorded at 0.69% (mtm) or 3.21% (yoy) in July 2016. Furthermore, headline inflation during Eid-ul-Fitr this year was controlled at a level below the historical average for the past four years due to concerted policy efforts and tight coordination between Bank Indonesia and the Government during the approach to Eid-ul-Fitr. Looking forward, policy coordination between Bank Indonesia and the Government to control inflation will continue, particularly in terms of VF inflation stemming from La Nina. Consequently, Bank Indonesia predicts inflation at the end of 2016 within the target corridor.

 Indonesia Holds New Key Rate at 5.25%