Indonesia: Bank Indonesia makes seventh consecutive decision to maintain rates
June 12, 2014
At its 12 June monetary policy meeting, the Central Bank decided to keep the BI policy rate at 7.50% for a seventh consecutive time. The decision matched market expectations. The decision to keep rates unchanged came amid a stabilization of inflationary pressures and expectations of further recovery in the current account despite April’s large trade deficit and declining exports. 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 continues to moderate. Household consumption and investment are strong, but they are on a slowdown. Performance of the export sector has also been notably weak, which has been caused by diminished external demand and a government restriction on exports of raw materials. However, 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 noted that inflationary pressures remained under control in May. The abundant harvest of commodities in recent months has led to lower prices for foodstuffs, while transport prices are rising ahead of the religious holiday season. While the Bank is confident that inflation will hit its target corridor this year, it will continue to monitor a number of risks going forward such as the impact of religious festivities and seasonal weather conditions.
With respect to the external sector, the Bank explained that the large trade deficit in April was in accordance with seasonal patterns, including increased demand before Ramadan. Moreover, while imports of primary goods such as machinery and electrical equipment increased, non-oil commodity exports decreased. The Bank expects the trade balance to recover going forward, however, amid strong manufacturing exports. The Bank added that capital inflows were strong again in May, which led to further accumulation of international reserves. The government is targeting a currency account deficit of 2.8%–2.9% of GDP in 2014. In terms of currency developments, the Bank noted that the rupiah weakened due in part to decreased investor confidence ahead of the presidential elections in July.
Author: Carl Kelly, Economist