Indonesia: Bank Indonesia holds rates in December after surprise hike at unscheduled meeting in November
December 11, 2014
At an unscheduled monetary policy meeting held on November 18, the Central Bank decided to hike the BI policy rate from 7.50% to 7.75%. The hike to the policy rate, which was the first increase since November 2013, aimed at containing inflationary pressures after the government announced an increase of more than 30% in the price of subsidized fuels. The lending facility rate was increased by 50 basis points to 8.00%, while the deposit facility rate was left unchanged at 5.75%. At its 11 December monetary policy meeting, the Central bank decided to keep the BI policy rate unchanged at 7.75%.
Bank Indonesia explained that the increase in November was, “taken to anchor inflation expectations and to ensure that inflationary pressures are under control after the subsidized fuel price increases.” The Bank also stated that the higher rates would help steer inflation back toward the target corridor of 4.0±1.0% in 2015. The Bank explained in its December statement that maintaining the policy rate at 7.75% would help ensure that inflationary pressures were “controlled and temporary”.
The Bank applauded the government’s move to improve its fiscal position through reduced fuel subsidies, noting that, “fiscal reform policy is a fundamental step and an essential part of the structural reforms needed to strengthen Indonesia’s economic fundamentals.” Despite price increases in the short term, the reallocation of budget subsidies to infrastructure spending and productive activities is expected to promote higher and more sustainable growth.
In December, Bank Indonesia acknowledged that the economy will likely continue to decelerate in the fourth quarter, but projected that growth will rebound in the first quarter of 2015 amid stronger government and private consumption. Despite stronger manufacturing exports, overall export growth is expected to remain limited due to weaker demand, particularly in emerging countries.
The Bank explained that annual inflation jumped from 4.8% in October to 6.2% in November due to the higher subsidized fuel prices, although core inflation was relatively contained. The Bank projects that the impact of the fuel price hike will linger for about three months and peak in December of this year. The Bank also stated that it will coordinate with the government to minimize longer-term effects of the hike.
Author: Carl Kelly, Economist