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Indonesia Monetary Policy March

Indonesia: Bank Indonesia leaves rates unchanged in March

At its 20–21 March monetary policy meeting, Bank Indonesia (BI) left the seven-day reverse repo rate at 6.00% for the fourth consecutive meeting, in line with market expectations. In addition, the Bank left the deposit facility rate and lending facility rate at 5.25% and 6.75%, respectively. BI also fleshed out the macroprudential measures announced in March’s meeting, which aim to boost private lending and domestic demand, and compensate for the significant monetary tightening observed throughout 2018.

The Bank’s decision to stay put came as the rupiah has gained significant value since last October, supported by capital market inflows against a backdrop of reduced international uncertainty and the U.S. Federal Reserve’s shift to a more dovish monetary stance. Moreover, on the domestic front, price pressures are subdued amid low core inflation; as a result, neither external nor internal factors compelled the Bank to tighten its stance. At the same time, economic activity is robust, while premature policy loosening could have renewed downward pressure on the rupiah, meaning an interest rate cut was not warranted either.

Bank Indonesia did not provide any explicit forward guidance in its communiqué, although it specified that monetary policy will be focused on maintaining external stability—which makes sense given that inflation is well under control. The recent announcement that the U.S. Federal Reserve will likely not hike at all this year has lessened pressure on BI to raise rates, which are expected to remain fairly steady in the near-term.

According to analysts at Nomura: “Overall, we think BI remains cautious on the risk of cutting the policy rate too early. […]. We believe the policy decisions and statements in the last two meetings suggest BI will continue to place a lot of emphasis on maintaining its credibility. We think this reflects that BI has learned from the experience of late-2017, when it cut rates back to back only to reverse course quickly and in fact hike rates quite aggressively throughout 2018.”

The next monetary policy meeting will be held on 24-25 April.

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