Indonesia: Bank Indonesia maintains rates again in October
October 7, 2014
At its 7 October monetary policy meeting, the Central Bank decided to keep the BI policy rate at 7.50% for the eleventh consecutive time. The decision was in line with market expectations and came amid ongoing weak growth momentum and downward inflationary pressures. The Bank also left the deposit facility rate and the lending facility rate unchanged at 5.75% and 7.50%, respectively.
Bank Indonesia acknowledged that economic growth continues to remain moderate, with household consumption on a downward trend and investment growth weak. Furthermore, the increase in government spending expected by the Bank has yet to materialize. Meanwhile, export growth has improved but remains lower than projected due to sluggish external demand. The Bank expects the economy to grow at the lower end of its previous projection of 5.1%-5.5%.
Despite the weak growth momentum, the Bank reiterated its language from previous meetings, stating that this month’s decision to maintain rates is, “consistent with efforts 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 explained that inflation eased in September, although inflationary pressures on energy goods have escalated amid higher government-administered prices. The Bank is prepared to coordinate with the government to control the impact of these adjustments as well as the potential effect of a likely cut in fuel subsidies in the coming months. President-elect Joko Widodo takes office on 20 October and is widely expected to begin cutting fuel subsidies, which are a huge burden on government finances.
With respect to the external sector, the Bank noted that the trade balance swung back to deficit in August. The non-oil trade surplus narrowed amid a large increase in non-oil imports in August. Moreover, improved investor perceptions concerning the country’s political and economic outlook have boosted the influx of foreign capital. In terms of currency developments, the Bank noted that the rupiah depreciated slightly in September due to the normalization of the U.S. Federal Reserve’s policies as well as uncertainty stemming from domestic factors. Specifically, the Bank signaled the, “wait-and-see attitude of investors concerning the formation of the new Cabinet as well as future government work programs, including policy related to fuel subsidies.”
Author: Carl Kelly, Economist