Indonesia: Bank Indonesia holds rates in August amid growing currency concerns
August 18, 2015
At its 18 August monetary policy meeting, the Central Bank decided to hold the BI policy rate at 7.50%, as expected by the market. This marks the sixth straight meeting with no change to the policy rate after a surprise 25-basis-point cut in February. The Bank continues to see the rate as appropriate considering the inflation outlook as well as the current state of the economy. Pronounced depreciation of the rupiah amid an expected interest rate increase in the U.S. and the depreciation of the Chinese yuan has severely limited the Bank’s ability to stimulate the struggling economy with another rate cut. The Bank also maintained the deposit facility rate at 5.50% and lending facility rate at 8.00%.
Bank Indonesia acknowledged that economic growth slowed in the second quarter. GDP growth was dragged down by weak government spending and public investment as new infrastructure projects are slow to take off. A “wait-and-see attitude” among private investors compounded the slump in investment and construction growth. Moreover, exports continue to be pressured by weak global demand and soft commodity prices. However, the Bank commented that trade surplus grew in July due to a dramatic decline in imports. As a result, the current account deficit improved from 4.3% of GDP in Q2 2014 to 2.1% of GDP in Q2 2015.
Regarding price developments, the Bank pointed out that inflationary pressures were contained in July despite the Ramadan festivities. Inflation came in at 7.3% for the second consecutive month and core inflation was 4.9%, down from 5.0% in June. The Bank is confident that its inflation target corridor of 4.0±1.0% for 2015 can be achieved.
The Bank emphasized that the rupiah is under pressure due mainly to external factors, including the anticipation of an interest rate hike by the Federal Reserve and the Chinese devaluation of the yuan. Growing domestic demand for foreign exchange to repay debt is another factor at play. The Bank stated that it will continue to intervene in the foreign exchange market to stabilize and defend the rupiah.
Author: Carl Kelly, Economist