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Indonesia Monetary Policy June 2018

Indonesia: Bank Indonesia hikes rates for the third time in six weeks

At its 28–29 June meeting, the Board of Governors of Bank Indonesia (BI) decided to hike its main interest rates by 50 basis points, above the increase of 25 basis points expected by market analysts. The decision marked the third hike in six weeks and was taken to support the value of the currency and maintain the attractiveness of the domestic financial market in view of tightening monetary conditions around the globe. As a result of the higher-than-expected hike, the seven-day Reverse Repo Rate now stands at 5.25%, while the Deposit Facility rate and Lending Facility rate stand at 4.50% and 6.00%, respectively.

According to the Bank, the decision was a “pre-emptive, front-loading and ahead of the curve move” in an attempt to maintain the strength of a currency currently hovering close to multi-year lows, against a background of increasing global trade tensions and tightening liquidity conditions. The exchange rate came under renewed pressure in the second half of June, after the Federal Reserve hiked rates and the European Central Bank decided to phase out Quantitative Easing by the end of the year; on 28 June, the rupiah had weakened 5.7% in year-to-date terms. Bank Indonesia expects that the decision to hike rates will strengthen economic stability and “specifically the Rupiah exchange rate stability”.

In terms of forward looking guidance, the Bank struck a slightly less hawkish tone compared to its last meeting, stating that it “will continue to monitor the domestic and global economic developments and outlook, to strengthen future policy mix responses”. Furthermore, the Bank stated that inflation should remain within its 2.5%?4.5% target range this year. Much will depend on the future evolution of the rupiah; if the currency stabilizes, further rate hikes in the short term are unlikely, but a tighter stance could be necessary if the rupiah continues to come under pressure.

The next monetary policy meeting will be held on 18 and 19 July.

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