Indonesia: Bank Indonesia keeps rates unchanged in September
September 18, 2015
At its 18 September monetary policy meeting, the Central Bank decided to hold the BI policy rate at 7.50% as expected by the market. This marks the seventh straight meeting with no change to the policy rate after the 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. The significant depreciation of the rupiah and the devaluation of the Chinese yuan have 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 the lending facility rate at 8.00%.
Bank Indonesia acknowledged that the economy decelerated in the second quarter. However, more recent data point to a pickup of the economy in the third quarter. Household spending has improved amid an increase in motorcycle sales. Moreover, investment is expected to record a robust growth rate in Q3 mainly reflecting a surge in government spending. Adding to that, the Bank commented that the trade balance recorded a surplus in August, although it was lower than the previous month’s surplus due to a surge in imports.
Regarding price developments, the Bank pointed out that inflationary pressures were contained in August, which broadly reflected post-Ramadan price corrections. Inflation was at 7.2% in August, which was down from the 7.3% recorded in July. The Bank is 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 is under pressure due mainly to external factors, including expectations of an interest rate hike by the Federal Reserve sooner rather than later and China’s 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