Indonesia Leaves Monetary Policy Unchanged

The Bank Indonesia left its benchmark interest rate on hold at 7.50 percent on December 17th, as widely expected. The lending facility and the deposit facility rate were also left unchanged at 8.0 percent and 5.5 percent respectively.

Excerpt from the statement by the Bank Indonesia:

Bank Indonesia believes that rooms for monetary easing are open, on the back of preserved macroeconomic stability, specifically end-2015 inflation that is projected to be below 3%, and current account deficit, projected at around 2% of GDP. In the short term, Bank Indonesia will monitor global financial market development post-Federal Funds Rate (FFR) hike as well as conditions of the domestic economy. Additionally, Bank Indonesia will strengthen coordination with the Government to control inflation, stimulate growth and accelerate structural reforms, thereby buoying economic growth while maintaining macroeconomic and financial system stability.

In line with weaker global growth, the economy of Indonesia also slowed in 2015. Accordingly, domestic economic growth was projected at 4.8% annually, down from the 5.0% (yoy) achieved in 2014. The slowdown was prompted by sluggish exports on the back of weaker global demand and lower commodity prices. In line with the continuosly weak export, limited investment growth was also recorded. In 2016, economic growth in Indonesia is projected in the range of 5.2-5.6% (yoy), bolstered by fiscal stimuli, primarily in the form of infrastructure projects, and tenacious consumption. Meanwhile, investment is expected to increase in line with solid macroeconomic stability and the implementation of government policy packages designed to attract investment. In addition, government measures to boost public purchasing power coupled with effective fiscal stimuli will play a key role in terms of catalysing economic growth in 2016.

Depreciatory pressures on the exchange rate have escalated in 2015, triggered by uncertainties in the FFR hike and Yuan depreciation. Through to November 2015, the rupiah depreciated by an average of 11.05% to a level of Rp13,351 per USD. Rupiah depreciation was precipitated by a number of externalities, including uncertainty surrounding the timing and magnitude of the FFR hike, concerns over fiscal negotiations in Greece and Yuan depreciation against a backdrop of economic moderation in China. On the home front, however, pressures on the rupiah stemmed from stronger demand for foreign currency for debt repayments and seasonal dividend payments as well as concerns over domestic economic moderation. 

Inflation in 2015 was projected below 3%. Low inflation was supported by volatile foods, deflation of administered prices and controlled core inflation. Volatile food inflation was low due to an abundant supply of foodstuffs. Inflation in 2016 was predicted to remain within the target corridor of 4±1%.

 Indonesia Leaves Monetary Policy Unchanged

Yekaterina Guchshina |
12/17/2015 12:20:46 PM