Indonesia: Bank Indonesia holds rates again in November despite slowdown
November 13, 2014
At its 13 November monetary policy meeting, the Central Bank decided to keep the BI policy rate at 7.50% where it has rested since November of last year. The decision, which was in line with market expectations, came amid ongoing weak growth momentum and contained inflationary pressures. The Bank also left the deposit facility rate and the lending facility rate unchanged at 5.75% and 7.50%, respectively.
Bank Indonesia acknowledged that the economy decelerated in the third quarter due in large part to weak investment and falling commodity exports amidst a backdrop of slowing global demand. The Bank expects the economy to grow at the lower end of its projection of 5.1%-5.5% this year. Despite the weak growth momentum, the Bank reiterated its language from previous meetings, stating that this month’s decision to maintain rates is, “consistent with efforts to steer inflation back towards its target corridor of 4.5±1.0% in 2014 and 4.0±1.0% in 2015, as well as to reduce the current account deficit to a more sustainable level.”
The Bank explained that inflation eased to a 4.5% annual rise in the third quarter, down from 6.7% in the second quarter. The decline in global commodity prices and moderate domestic demand is helping contain inflationary pressures. However, the cost of energy goods has continued to creep up due to higher government-administered prices. In addition, the Bank emphasized that inflation expectations are rising on the potential that the government will cut fuel subsidies in the coming months.
With respect to the external sector, the Bank noted that the current account deficit narrowed in Q3 thanks to an increase in the non-oil trade surplus. A decline in non-oil imports and positive growth in manufacturing exports were behind the improvement. Moreover, improved investor perceptions concerning the country’s political and economic outlook have boosted the influx of foreign capital. In terms of currency developments, the Bank noted that the rupiah depreciated in the third quarter and that will likely continue to weaken due to the normalization of the U.S. Federal Reserve’s policies, the global economic slowdown, and uncertainty regarding domestic political issues.
Author: Carl Kelly, Economist