Indonesia Monetary Policy November 2016

Indonesia

Indonesia: Bank Indonesia holds interest rates, strikes cautious tone

November 17, 2016

At its 16–17 November 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. 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 has cut rates several times this year to boost the economy, which has been hit by weak external demand and low prices for commodities. However, the Bank struck a more cautious tone in the accompanying statement, suggesting a halt in the easing cycle as recent market gyrations following the surprise election of Donald Trump in the U.S. have hurt the rupiah and pushed the currency to five-month lows.

In the accompanying statement, the Bank emphasized that it considers the current level of the BI seven-day RR rate sufficient to maintain growth momentum. Solid domestic demand supported the economy in Q3 and the Bank sees GDP expanding between 5.0% and 5.4% next year. In addition, moderate price pressures contributed to the unchanged policy stance and the Bank forecasts inflation coming in around the lower end of its target of 4% plus or minus 1.0 percentage point.

The statement was devoid of strong forward guidance, but it struck a more cautious tone than previous statements. The Bank cited, “increasingly uncertain global financial markets in the wake of the US election” and emphasized it would continue to provide exchange rate stability. The recent depreciation of the rupiah and likelihood of an upcoming hike in U.S. interest rates—which would add to exchange rate pressures—have increased expectations of a pause in the easing cycle.

Against this backdrop, the majority of FocusEconomics Consensus Forecast panelists see no change to the BI seven-day RR rate this year, with an average forecast of 4.70% at the end of 2016. For 2017, panelists expect the BI rate to end the year at 4.63%.


Author: Angela Bouzanis, Senior Economist

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Indonesia Monetary Policy November 2016

Note: BI seven-day Reverse Repo rate in %.
Source: Bank Indonesia (BI).


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