Indonesia: Bank Indonesia holds rates at start of what promises to be a better but no less challenging year
January 16, 2015
At its 15 January monetary policy meeting, the Central Bank decided to keep the BI policy rate at 7.75% for a second time in a row. The Bank had hiked the policy rate from 7.50% to its current level in an unscheduled meeting on 18 November in an attempt to contain inflationary pressures after the government increased the price of subsidized fuels by more than 30%. The Bank also left the deposit facility rate and the lending facility rate unchanged at 5.75% and 8.00%, respectively. The Bank stated that January’s decision to maintain rates is, “consistent with efforts to steer inflation back towards its target corridor of 4.0±1.0% in 2015 and 2016, as well as manage the current account deficit to a more sustainable level.”
Bank Indonesia acknowledged that the economy continued to decelerate in the fourth quarter, bringing in GDP growth for the year at around 5.1%, below the 5.8% growth tallied in 2013. Weaker global demand for commodity exports, restrained government spending, and limited investment dragged down growth during 2014. The Bank also noted that a national macroeconomic stability program was required throughout the past year to confront the challenge of the expected normalization of the U.S. Federal Reserve’s monetary policy as well as an uneven global economic recovery. However, stronger household consumption and greater government spending due to increased fiscal capacity is expected to boost growth in 2015 to 5.4%-5.8%.
The Bank explained that inflation jumped to 8.4% at the close of 2014, mainly due to the fuel price hike introduced in November. However, the Bank forecasts that inflation will be brought back under control amid stable core inflation and the declining international oil price.
Regarding the external sector, the Bank emphasized that the balance of payments improved in 2014. The current account decreased thanks to a surge in manufacturing exports, weaker import demand, and falling global oil prices. The ongoing decline of global oil prices and the government subsidy reform program is expected to improve the current account, although gains may be offset by non-energy imports as the government ramps up infrastructure projects. Moreover,the capital account recorded a surplus due to positive growth in foreign direct investment.
In terms of currency developments, the rupiah depreciated against the dollar throughout 2014 due to the looming normalization of monetary policy in the U.S. However, the rupiah has appreciated against other major currencies, such as the yen and euro.
Author: Carl Kelly, Economist