Indonesia: Bank Indonesia holds rates in July
June 14, 2015
At its 14 July monetary policy meeting, the Central Bank decided to hold the BI policy rate at 7.50%, as expected by the market. This marks the fifth 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. Moreover, the decision highlights that the Bank has limited maneuverability to stimulate the slowing economy. The Bank also maintained the deposit facility rate at 5.50% and lending facility rate at 8.00%.
Bank Indonesia commented that economic growth is expected to remain limited in the second quarter. Private consumption is subdued and investment is weak amid a slow implementation of new infrastructure incentives. On the other hand, in July, the trade balance recorded another surplus due to a non-oil and gas surplus, thus improving the current account deficit in Q2. In addition, foreign capital inflows surged despite increased uncertainty in global financial markets. Looking forward, the Bank expects the economy to gain momentum in the second half of the year as infrastructure projects are implemented and banks extend lending.
Regarding price developments, the Bank pointed out that in June, inflationary pressures were less intense than previously estimated. Inflation reached 7.3% in June and core inflation was relatively controlled at 5.0%, in line with well-anchored inflation expectations. The Bank is confident that its inflation target corridor of 4.0±1.0% for 2015 can be achieved.
The Bank said that, in June, the rupiah depreciated by 1.28% against the U.S. dollar. Externally, the currency was influenced by concerns over debt restructuring negotiations between Greece and its international lenders as well as by investor anticipation of the policy direction pursued by the Federal Reserve on its June meeting. Internally, growing demand for foreign exchange to repay debt has put pressure on the rupiah.
Author: Carl Kelly, Economist