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Indonesia Monetary Policy August 2018

Indonesia: Bank Indonesia hikes rates in August; government announces import restrictions to stabilize currency

At its 14 and 15 August monetary policy meeting, Bank Indonesia (BI) raised the seven-day reverse repo rate by 25 basis points to 5.50%. The decision took analysts by surprise and marked the fourth 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 4.75% and 6.25%, respectively.

The Central Bank’s move aims to buttress the rupiah, which has continued to depreciate against the dollar over the last month despite previous monetary tightening. Rupiah weakness is being driven by strong economic growth in the U.S. and rising global uncertainty—exacerbated recently by the precipitous collapse of the Turkish lira, which has led to ripple effects across other emerging market currencies, including Indonesia’s. In addition, the external sector has weakened considerably so far this year; import growth has massively outpaced export growth, and the current account deficit in Q2 reached a multi-year high, putting further downward pressure on the currency. Internally, domestic price pressures remain moderate, pinned down by government price controls on electricity and fuel. At 3.2%, inflation in July was well within the Bank’s target range of 2.5%-4.5%.

Tighter monetary policy will go hand-in-hand with government measures announced in mid-August to restrict surging imports and encourage greater import substitution in order to support the currency. Measures include raising the amount of domestic palm biodiesel blended into fuel, a 7.5% tariff on imports deemed unnecessary, and delays to government projects with a heavy import content. According to the government, the biodiesel mandate alone could trim crude imports by USD 2.3 billion this year.

The Bank did not offer any explicit guidance as to the future direction of monetary policy, although future changes to rates are likely to continue to depend mainly on external developments. With the U.S. Federal Reserve set to raise the Federal Funds Target Rate several times over the next year, Bank Indonesia is likely to tighten monetary policy further going forward in order to protect the currency.

The next monetary policy meeting will be held on 26 and 27 September.

Indonesia Interest Rate Forecast

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