Indonesia: Bank Indonesia leaves rates unchanged in October, but further tightening still likely looking ahead
October 23, 2018
At its 22–23 October monetary policy meeting, Bank Indonesia (BI) left the seven-day reverse repo rate unchanged at 5.75%, after hiking rates for the fifth time this year in September. The decision was broadly in line with market expectations. In addition, the Bank left the deposit facility rate and lending facility rate at 5.00% and 6.50%, respectively. The Bank also highlighted that hedging arrangements for firms—previously announced in the prior policy meeting—would be implemented from 1 November.
The Bank’s decision to stay put came despite further rupiah weakness over the last month, which has seen the currency fall to fresh lows against the dollar. However, the Bank did not judge this currency depreciation to be severe enough to warrant further monetary tightening at the current juncture, given substantial rate hikes earlier this year, ongoing FX market intervention and government measures to trim imports. The domestic front provided little rationale for a rate hike either, given that cost pressures are muted, while inflation has tracked in the lower part of the Bank’s 2.5%–4.5% target range in recent months.
Bank Indonesia did not provide any explicit forward guidance in its communiqué. However, with the U.S. Federal Reserve set to raise the target range for the federal funds rate several times over the next 12 months, Bank Indonesia will likely tighten monetary policy further going forward to protect the currency.
The next monetary policy meeting will be held on 19–20 December.
Indonesia Interest Rate Forecast
FocusEconomics Consensus Forecast panelists expect the reverse repo rate to end 2019 at 6.33% and 2020 at 6.03%.
Author: Oliver Reynolds, Economist