Indonesia: Bank Indonesia maintains rates again amid economic improvements
March 13, 2014
At its 13 March monetary policy meeting, the Central Bank decided to keep the BI policy rate at 7.50% for the fourth consecutive meeting. The decision matched market expectations. The Bank increased the BI policy rate by a cumulative 175 basis points between June and November of last year to counter inflation, the negative trade balance, and a weakening currency. This month's decision to keep rates unchanged comes amid lower inflation and a shrinking current account deficit. The Bank also kept the deposit facility rate and the lending facility rate unchanged at 5.75% and 7.50% respectively. Bank Indonesia reiterated its language from the previous meeting, stating that its decision is, “consistent with the tight monetary policy stance currently adopted in order to steer inflation back towards its target corridor of 4.5±1.0% in 2014 and 4.0±1.0% in 2015, as well as to reduce the current account deficit to a more sustainable level.” The Bank noted that inflation decreased in February as government policies that were introduced to counter disruptions to food production and supply chains following a period of flooding take effect. With lower inflation in February, the Bank is now confident that inflation for the year will hit its target corridor. With respect to the external sector, the Bank emphasized that there have been, “persistent improvements.” The Bank recognized that seasonal factors and a government ban on mineral and oil exports pushed the trade balance back to a deficit. However, it considers these issues to be temporary and expects that strong export demand from top trading partners will help the trade balance return to a surplus. In addition, the Bank foresees that the, “current account deficit will be managed at a level of below 3.0% of GDP.” In terms of currency developments, the Bank noted that an improved economic environment has helped strengthen the rupiah exchange rate. FocusEconomics Consensus Forecast panelists expect the BI rate to average 7.57% at the end of 2014. For 2015, panelists expect the BI rate to end the year at 7.28%.
Author: Carl Kelly, Economist