Indonesia Monetary Policy April 2016

Indonesia

Indonesia: Bank Indonesia announces new monetary policy framework; pauses easing cycle

April 15, 2016

Bank Indonesia unveiled a new monetary policy framework on 15 April in an effort to improve the effectiveness of its monetary policy going forward. Effective as of 19 August, the seven-day (reverse) repo rate will become the new policy rate—to be called the “BI repo rate”—replacing the current BI policy rate. In addition, a narrower interest rate corridor will be established at 75 basis points above/below the BI repo rate and will be anchored by the lending facility rate and the deposit facility rate.

The Central Bank outlined that the new framework is designed to improve policy signaling and make transmission more effective. Despite several cuts to the BI policy rate over the past year, the change has barely been reflected in average lending rates in Indonesia. The current BI policy rate is a reference rate, while the BI repo rate is a transactional rate and more directly linked to the market. The Bank also highlighted that the new structure is designed to support financial market deepening and announced a set of measures to facilitate this goal. Notably, the Bank stressed that the decision did not reflect a change in its monetary policy stance, rather only in the framework. Commenting on the decision, Glenn Maguire, Chief Economist at ANZ, adds:

“In our view, this improved monetary transmission will ensure that the effects of monetary policy loosening are transmitted to the real economy not only through the interest rate channel but also through the lending channel. At this stage, we would assess the new monetary policy structure as having the required elements to theoretically boost lending by the larger banks. If this is the case, the following policy implication may be derived: a loosening of monetary policy in future can have a greater-than-expected impact on aggregate economic activity (e.g. on investment behaviour) through the lending channel, with market interest rates falling more than would have been expected.”

Shortly after the unveiling of the new monetary policy framework, Bank Indonesia paused its easing cycle on 21 April after having cut the policy rate at three consecutive meetings. The Bank decided to hold the BI rate at 6.75% as expected by the majority of market analysts. Accordingly, the Bank held the deposit facility rate and the lending facility rate at 4.75% and 7.25%, respectively. In addition, the Bank held the new benchmark for monetary policy, the BI seven-day (reverse) repo rate, at 5.50%. The Bank commented that this decision is designed to keep inflation within the target range of 4.0% plus/minus one percentage point while encouraging economic growth against a backdrop of slowing global growth.

FocusEconomics Consensus Forecast panelists expect the BI rate to average 6.61% at the end of 2016. For 2017, panelists expect the BI rate to end the year at 6.47.


Author: Angela Bouzanis, Senior Economist

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