Indonesia: Bank Indonesia hikes rates again in September to bolster the currency
September 28, 2018
At its 26–27 September monetary policy meeting, Bank Indonesia (BI) raised the seven-day reverse repo rate by 25 basis points to 5.75%. The decision was broadly in line with market expectations and marked the fifth rate hike so far in 2018. In addition, the Bank increased the deposit facility rate and lending facility rate by 25 basis points each to 5.00% and 6.50%, respectively. The Bank also announced new hedging arrangements for firms and promised to continue working closely with the government to strengthen the external sector.
The Bank’s tighter monetary stance—coupled with the new hedging arrangements—aims to support the rupiah, which has lost nearly 10% of its value against the U.S. dollar so far this year. Rupiah weakness is being driven by Indonesia’s widening current account deficit and a broader pull-out from emerging markets. The Bank’s move came soon after the Federal Reserve increased its policy rate by 25 basis points and should help maintain the relative attractiveness of Indonesia’s financial markets. Internally, domestic price pressures remain moderate, pinned down by government price controls on electricity and fuel. Inflation has remained comfortably within the Bank’s target range of 2.5%–4.5% in recent months.
Looking ahead, Governor Perry Warjiyo struck a hawkish tone in a press release following the policy meeting, while Bank officials have repeatedly promised to continue taking pre-emptive action to ensure financial stability. With the U.S. Federal Reserve set to raise the target range for the federal funds rate several times over the next 12 months, Bank Indonesia is likely to tighten monetary policy further going forward to protect the currency.
The next monetary policy meeting will be held on 22–23 October.
Indonesia Interest Rate Forecast
Last month, FocusEconomics Consensus Forecast panelists expected the reverse repo rate to end 2018 at 5.76% and 2019 at 5.95%. Our panelists are currently taking the Bank’s latest move into account, with a new Forecast to be published on 16 October.
Author: Oliver Reynolds, Economist