Indonesia: Bank Indonesia keeps rates unchanged again in November, but cuts reserve requirement to stimulate lending
November 17, 2015
At its 17 November monetary policy meeting, the Central Bank decided to hold the BI policy rate at 7.50%, as expected by the market. The Bank has made no changes to the policy rate since implementing a surprise 25-basis-point cut in February. The Bank stated that there is potential for monetary policy easing in the future, but refrained from cutting the policy rate in November amid ongoing concerns over currency stability and the potential impact of the Federal Reserve’s looming rate hike. The Bank also maintained the deposit facility rate at 5.50% and the lending facility rate at 8.00%. However, the Bank did decide to lower the primary reserve requirement ratio for banks from 8.00% to 7.50% in an attempt to increase the amount of credit in the financial system.
Bank Indonesia emphasized that the economy grew 4.7% in the third quarter due mainly to stronger government consumption and investment. The Bank expects growth momentum to build further in the fourth quarter as government infrastructure projects accelerate. Despite improvements at a domestic level, persistently low commodity prices and sluggish global demand continue to drag on the external sector. The Bank noted that the current account deficit narrowed from 3.0% in Q3 2014 to 1.9% in Q3 2015. This improvement, “stemmed from gains in the non-oil and gas trade balance as imports decreased sharply in line with limited domestic demand.” Meanwhile, the oil and gas trade balance held in deficit as commodity exports flounder.
Regarding price developments, the Bank pointed out that inflation decreased from 6.8% in September to 6.2% in October, broadly reflecting an abundant food supply. The Bank is still confident that its inflation target corridor of 4.0% plus or minus 1.0% for 2015 can be achieved.
The Bank emphasized that the rupiah has rebounded recently after having depreciated drastically in Q3. The currency has recovered amid increased investor confidence after the government introduced a series of stimulus measures and higher optimism regarding the domestic economic outlook. However, the Bank stated that it will continue to intervene in the foreign exchange market to defend the rupiah, particularly as an interest rate hike in the U.S. approaches.
Author: Carl Kelly, Economist