Indonesia: Bank Indonesia hikes rates in response to fuel price hike
November 18, 2014
At an unscheduled monetary policy meeting held on November 18, the Central Bank decided to hike the BI policy rate from 7.50% to 7.75%. The hike to the policy rate, which is the first increase since November of last year, is aimed at containing inflationary pressures after the government announced a more than 30% increase in the price of subsidized fuels. The lending facility rate was increased by 50 basis points to 8.00%, while the deposit facility rate was left unchanged at 5.75%.
Bank Indonesia explained that the increase was, “taken to anchor inflation expectations and to ensure that inflationary pressures are under control after the subsidized fuel price increases.” The Bank also stated that the higher rates will help steer inflation back toward the target corridor of 4.0±1.0% in 2015. The Bank added that it will introduce macroprudential policy adjustments to maintain credit supply in the economy and coordinate with the government to minimize the impact of inflationary pressures on transport fares and basic food goods.
The Bank applauded the government’s move to improve its fiscal position through reduced fuel subsidies, noting that, “fiscal reform policy is a fundamental step and an essential part of the structural reforms needed to strengthen Indonesia’s economic fundamentals.” Despite price increases in the short term, the reallocation of budget subsidies to infrastructure spending and productive activities is expected to promote higher and more sustainable growth.
Author: Carl Kelly, Economist