Indonesia: Bank Indonesia leaves rates unchanged in May amid renewed currency pressure
May 16, 2019
At its 15-16 May monetary policy meeting, Bank Indonesia (BI) left the seven-day reverse repo rate at 6.00% for the sixth 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. At its previous meeting in April, the Bank had announced further macroprudential measures to boost liquidity and stimulate domestic demand. The Bank’s decision to stay put came following renewed pressure on the rupiah in recent weeks, on the back of the escalation in the U.S.-China trade war and seasonally higher demand for foreign currency. In mid-May, the currency had sunk to close to IDR 14,500 per USD, the weakest level so far this year, and any rate cut by the Bank would have risked exacerbating the depreciation. However, BI was confident that the current currency weakening would be temporary and, with domestic price pressures muted, thus saw no reason to hike rates either.
Bank Indonesia did not provide any explicit forward guidance in its communiqué. That said, given resilient economic growth, the currency’s vulnerability to changes in investor sentiment and the sizeable current account deficit—which the Central Bank now estimates will be larger than previously expected this year—the Bank is unlikely to risk a rate cut in the near-term. The majority of FocusEconomics panelists share this view, although a few panelists do see rates being lowered towards the end of 2019.
According to Wisnu Wardana, an economist at Bank Danamon: “A shift of monetary stance would require a more balanced external account, […]. Given current conditions, […] any room to cut policy rates will transpire at the last month of this year.”
The next monetary policy meeting will be held on 19-20 June.
Author: Oliver Reynolds, Economist