Indonesia Monetary Policy January 2017

Indonesia

Indonesia: Bank Indonesia holds interest rates amid reduced room for easing

January 19, 2017

At its 18–19 January monetary policy meeting, Bank Indonesia decided to hold the BI seven-day Reverse Repo rate (BI seven-day RR rate) at 4.75%. The decision was widely anticipated by market analysts after the Bank had made several rate cuts in 2016. In addition, the Bank decided to hold the lending facility rate and the deposit facility rate at 5.50% and 4.00%, respectively.

The Central Bank’s unchanged stance is due to less need and reduced space for monetary policy easing. The Bank eased financial conditions last year and economic activity was likely healthy in the final quarter and has a favorable outlook going forward. Further, the U.S. election has sparked volatility in financial markets and clouded the global outlook this year. The prospect of further tightening in the U.S. is putting pressure on emerging market currencies and has reduced space for Bank Indonesia to loosen monetary policy conditions.

The Bank provided little forward guidance, stating that future decisions will depend on the trajectory of inflation and the economic recovery. The majority of our panelists see the Bank pausing rates, while waiting for external developments to unfold. Commenting on their forecast, Weiwen NG, Economist at ANZ, states:

“The need and room for monetary easing is reduced amid expectations of firmer domestic demand, higher inflation, US rates normalisation and challenging credit transmission. We thus maintain our view that BI will remain on hold throughout 2017, with a neutral monetary policy stance.”

While a number of panelists see no change to the BI seven-day RR rate in 2017, some have divergent views and the average forecast is for 4.67% at the end of the year. For 2018, panelists expect the BI rate to end the year at 4.80%.


Author: Angela Bouzanis, Senior Economist

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