Indonesia: Bank Indonesia makes eighth consecutive decision to maintain rates
July 10, 2014
At its 10 July monetary policy meeting, the Central Bank decided to keep the BI policy rate at 7.50% for an eighth consecutive time. The decision was in with line market expectations and came amid weakening growth momentum, the stabilization of inflationary pressures and expectations for further recovery in the current account. 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 the domestic economy slumped in Q1. Household consumption, government spending and investment all slowed during this period. Moreover, the weak performance recorded in the exports sector was due in large part to a government restriction on exports of raw materials. In contrast, exports of manufactures improved, especially exports of transport equipment. The Bank noted that there are, “early indications that Indonesia is becoming a dependable motor vehicle production base for leading markets in ASEAN, Japan and other Asian countries.”
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 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 explained that inflationary pressures remained under control in June. Inflation was up on a monthly basis due to Ramadan festivities, but it was down in annual terms.
With respect to the external sector, the Bank explained that the trade balance recovered from the large deficit incurred in April with a modest surplus in May. The improvement was driven by a surplus of non-oil exports. The Bank added that capital inflows ebbed slightly in June as investors await the results of the presidential election, but the amount of accumulated international reserves is more than sufficient. In terms of currency developments, the Bank also noted that the rupiah has weakened somewhat due to the, “wait-and-see attitude of investors towards the election.”
Author: Carl Kelly, Economist