Indonesia: Bank Indonesia maintains rates amid improving economic fundamentals
February 13, 2014
At its 13 February monetary policy meeting, the Central Bank decided to keep the BI policy rate at 7.50% for the third 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 weakening currency. This month's decision to keep rates unchanged comes amid ongoing improvements with respect to those indicators, particularly in the current account balance. However, the benefits of high rates have also translated into lower growth, with GDP falling from 6.3% in 2012 to 5.8% in 2013. The Bank also kept the deposit facility rate and the lending facility rate unchanged at 5.75% and 7.25% respectively.
Bank Indonesia stated 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 the jump in monthly inflation between December and January was driven by disruptions to food production and supply chains following a period of flooding. Moreover, the Bank explained that the rate of inflation is, "in harmony with historical trends."
With respect to the external sector, the increase in exports taking place as the global economy rebounds is driving a growing trade surplus and helping to reduce the current account. The Bank stated that the current account deficit decreased sharply, from 3.8% of GDP in Q3 to 2.0% in Q4. In terms of currency developments, the Bank noted that an improved economic environment has helped, "assuage depreciatory pressures plaguing rupiah exchange rates."
FocusEconomics Consensus Forecast panelists expect the BI rate to average 7.56% by the end of 2014. For 2015, panelists expect the BI rate to end the year at 7.28%.
Author: Carl Kelly, Economist