Indonesia Monetary Policy

Indonesia

Indonesia: Bank Indonesia holds rates again in May despite growing political pressure to boost growth

May 19, 2015

At its 19 May monetary policy meeting, the Central Bank decided to hold the BI policy rate at 7.50%, as expected by the market. This marks the third straight meeting with no change to the policy rate after a surprise 25 basis point cut in February. The economy continues to lose momentum, as evidenced by a multi-year low GDP growth rate in Q1, but the Bank is reticent to cut rates due to concerns over currency depreciation and capital outflows. The Bank also maintained the deposit facility rate at 5.50% and lending facility rate at 8.00%. However, the Bank said it would introduce measures to encourage increased bank lending and economic activity, including a relaxation of loan-to-deposit ratios, mortgage regulations, and vehicle loan requirements.

Bank Indonesia acknowledged that the economy slowed in Q1. GDP moderated from a 5.0% expansion in Q4 of last year to a 4.7% increase in Q1, which marked the slowest growth since 2009. The deceleration was driven by weak domestic demand, particularly government spending and construction investment. Holdbacks to spending at government agencies and slow implementation of new infrastructure projects were a drag on growth. The Bank still expects the economy to pick up speed in coming quarters, although it recognized that, “acceleration in government spending and the implementation of infrastructure projects realization is the key catalyst for growth in 2015.”

The Bank pointed out that annual inflation ticked up from 6.4% in March to 6.8% in April. 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 current account deficit narrowed to USD 3.8 billion (1.8% of GDP) in Q1, down from USD 5.7 billion (2.6% of GDP) in Q4 and USD 4.1 billion (1.9% of GDP) during the same period in 2014.The decline was driven mainly by a strengthening trade balance as oil imports continue to decline and non-oil and gas exports begin to recover. The Bank explained that its rate hold this month was aimed in part at helping, “manage the current account deficit at around 2.5-3% of GDP in the medium term.”

In terms of currency developments, the rupiah recovered ground in April after having depreciated significantly in Q1. A pushback of expectations for when the Fed will begin raising rates aided the recent correction. The Bank asserted in earlier meetings that a weaker rupiah will benefit the current account deficit through lower imports of consumer goods and greater export competitiveness, but that it aims to avoid a rapid depreciation.

FocusEconomics Consensus Forecast panelists expect the BI rate to average 7.22% at the end of 2015. For 2016, panelists expect the BI rate to end the year at 6.92%.


Author:, Economist

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Indonesia Monetary Policy May 2015

Note: BI rate in %.
Source: Bank Indonesia (BI).


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