Indonesia: Bank Indonesia holds main interest rate but modifies corridor
August 19, 2016
At its 18–19 August monetary policy meeting, Bank Indonesia decided to leave the BI seven-day Reverse Repo rate (BI seven-day RR rate) unchanged at 5.25%. The BI seven-day RR rate became Bank Indonesia’s main policy instrument as of 19 August, replacing the former BI rate. The move was in line with market expectations. However, the Bank decided to cut the lending facility rate—the top end of the monetary policy corridor—by 100 basis points to 6.00%, while holding the deposit facility rate unchanged at 4.50%. As a result, the monetary policy corridor is now symmetric at 75 basis points around the BI seven-day RR rate.
The Central Bank’s decision to modify the corridor is part of its ongoing efforts to improve monetary transmission effectiveness. In its accompanying statement, the Bank remarked that transmission through the credit channel remains suboptimal and credit growth has been low.
Regarding the economy, the Bank revised down its growth forecast for 2016 from 5.0–5.4% to 4.9–5.3% as it expects less government stimulus in the second half of the year. The Bank also pointed out that although growth picked up in Q2, gains have been uneven across regions and sectors. Looking forward, the Bank sees looser monetary conditions combined with the government’s stimulus policy and the tax amnesty encouraging faster growth. The Bank hinted that further easing is likely, stating that, “Bank Indonesia believes that by maintaining macroeconomic stability, especially a controlled inflation within the target range, an improved current account deficit, and relatively stable exchange rate, rooms for monetary easing remains open.”