Indonesia: Bank Indonesia makes ninth consecutive decision to maintain rates
August 14, 2014
At its 14 August monetary policy meeting, the Central Bank decided to keep the BI policy rate at 7.50% for a ninth consecutive time. The decision was in line with market expectations and came amid weakening growth momentum, downward inflationary pressures and a stubborn current account deficit. 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 slowed in Q2 to a 5.1% annual expansion. The deceleration was driven in large part by weak performance of the external sector, including falling exports of minerals. Government spending and investment also slowed during this period, although household consumption showed more resilience. The Bank expects economic growth to remain subdued in the months to come.
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 inflation was on a downward trend in July, with both monthly and annual figures notably low, particularly when compared to previous Ramadan seasons.
With respect to the external sector, the Bank explained that the current account deficit reached 4.27% of GDP in Q2. Moreover, the trade balance returned to deficit in June, as an increase in the non-oil trade was not enough to offset a growing oil and gas trade deficit. Slowing external demand and the government’s ongoing mineral export ban are dragging on exports’ performance. In terms of currency developments, the Bank noted that the rupiah is expected to stabilize now that investor uncertainty regarding the presidential election subsides.
Author: Carl Kelly, Economist