Indonesia Monetary Policy June 2016


Bank Indonesia holds interest rates within healthy economic backdrop

At its 20–21 July monetary policy meeting, Bank Indonesia decided to leave the BI policy rate unchanged at 6.50%. The move followed a 25-basis-point cut at the last meeting and surprised market analysts who had expected a further cut. Accordingly, the Bank also held the deposit facility rate and the lending facility rate at 4.50% and 7.00%, respectively. In addition, the Bank decided to keep the BI seven-day (reverse) repo rate, which will become the new benchmark for monetary policy on 19 August, unchanged at 5.25%.

The Central Bank’s decision came against a healthy backdrop for the Indonesian economy amid low inflation and a stable exchange rate. Monetary policy transmission has improved in the economy and the policy reformulation should support looser monetary conditions going forward, which will, in turn, boost growth. Commenting on the government’s recent tax amnesty law, the Bank sees the bill as positive for growth and will introduce new investment instruments in the financial markets to support the policy. On the downside, the Bank sees heightened risks to the global economy following the Brexit vote, which could undermine economic momentum in several countries going forward, but will likely delay further hikes in US interest rates.

Against this backdrop the Bank decided to keep its monetary stance unchanged. Looking forward, the Bank signaled that monetary conditions will be kept loose by stating that, “Bank Indonesia believes that the loose monetary and macroprudential policy, combined with implementation of the Tax Amnesty Act, will [sic] stimulate credit growth and foster sustainable economic growth.”

FocusEconomics Consensus Forecast panelists expect the BI rate to average 6.45% at the end of 2016. For 2017, panelists expect the BI rate to end the year at 6.29%.

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