Indonesia: Bank Indonesia holds rates again in April
April 14, 2015
At its 14 April monetary policy meeting, the Central Bank decided to hold the BI policy rate at 7.50%, as expected by the market. The Bank cut the policy rate by 25 basis points in a surprise move in February in an attempt to boost economic growth, but made no change in March and now again in April primarily due to concerns over capital outflows and rapid currency depreciation. The Bank also maintained the deposit facility rate at 5.50% and lending facility rate at 8.00%.
Bank Indonesia noted that economic growth was moderate in the first quarter of the year but it expects a rebound in Q2. Growth in Q1 was sustained by private consumption, while investment and exports slowed. Government spending is expected to pick up going forward as a variety of infrastructure projects begin. Growth in 2015 will hinge in large part on the scope and progress of these projects, as well as on the extent of improvements in the export sector. The Bank now expects GDP growth to come in at the lower range of 5.4%-5.8%.
The Bank pointed out that annual inflation ticked up from 6.3% in February to 6.4% in March, marking the first rise in three months. Inflation was up on higher administered prices, although core inflationary pressures remained under control. The Bank maintains its inflation target corridor of 4.0±1.0% for 2015 and 2016.
Regarding the external sector, the trade balance recorded another surplus in March, due primarily to a non-oil and gas surplus. A decrease in the oil and gas trade deficit, stemming from the government’s subsidy reform, also helped reduce some pressure on the country’s stubbornly large current account deficit. The Bank stated that its rate hold this month was aimed in part at guiding the current account deficit, “to a more healthy level in the range of 2.5-3% of GDP in the medium term.” The Bank acknowledged that foreign direct investment flows have come under pressure due to uncertainty in global financial markets.
In terms of currency developments, the rupiah continued to depreciate against the U.S. dollar in February. However, the Fed’s recent dovish monetary policy statements and currency stabilization policies implemented by the Bank have curtailed the losses. The Bank considers that a weaker rupiah will benefit the current account deficit through lower imports of consumer goods and greater export competitiveness, but aims to avoid a rapid depreciation.
Author: Carl Kelly, Economist