Indonesia: Bank Indonesia holds rates to calm capital outflows and currency volatility
March 17, 2015
At its 18 March monetary policy meeting, the Central Bank decided to hold the BI policy rate at 7.50%. The move, which met market expectations, follows the surprise 25 basis point cut implemented at the previous meeting in February in an attempt to stoke economic growth. While boosting the economy remains a priority, the decision to hold the rate at this time comes primarily amid concern over capital outflows, exchange rate volatility, and a persistent current account deficit. The Bank also maintained the deposit facility rate at 5.50% and lending facility rate at 8.00%.
Bank Indonesia emphasized that it expects the economy to gather momentum during the course of this year. The Bank explained that increases in private consumption and government spending will drive an improvement already in Q1. Meanwhile, the external sector continues to suffer amid weak global demand and low commodity prices. Growth this year will accelerate on the back of increased investment and government infrastructure projects.
The Bank pointed out that consumer prices dropped 0.36% in February over the previous month. Moreover, annual inflation receded from 7.0% in January to 6.3% in February. Core inflationary pressures also subsided. Declining inflationary pressures are being driven by moderate domestic demand and weak global commodity prices. The Bank maintains its inflation target corridor of 4.0±1.0% for 2015 and 2016.
Regarding the external sector, the trade balance recorded a third straight surplus in February, due primarily to a non-oil and gas surplus. A surplus in the oil and gas sector in February also helped reduce some pressure on the country’s stubbornly large current account deficit. The Bank stated that its rate hold this month was aimed at guiding the current account deficit, “to a more healthy level in the range of 2.5-3% of GDP in the medium term.” The Bank suggested that foreign direct investment will grow as the domestic outlook improves.
In terms of currency developments, the rupiah continued to depreciate against the U.S. dollar in February. Solid economic growth in the U.S. and the launch of the ECB’s quantitative easing program have driven the dollar to appreciate further. The Bank explained that it will continue to intervene in the foreign exchange market to stabilize the currency. The Bank considers that a weaker rupiah will benefit the current account deficit through lower imports of consumer goods and greater export competitiveness, but aims to avoid a rapid depreciation.
Author: Carl Kelly, Economist