Indonesia: Bank Indonesia makes sixth consecutive decision to maintain rates
May 8, 2014
At its 8 May monetary policy meeting, the Central Bank decided to keep the BI policy rate at 7.50% for a sixth consecutive time. 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 a weakening currency. This May decision to keep rates unchanged came amid a continuing downward trend in inflation and a narrowing 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 5.2% economic expansion in the first quarter was disappointing. The slowdown from the 5.7% increase in the previous quarter was driven by a contraction in exports, which, in turn, was caused by weaker demand from China 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 4.5Â±1.0% in 2014 and 4.0Â±1.0% in 2015, as well as to reduce the current account deficit to a more sustainable level.” The Bank noted that inflationary pressures continued to decrease in April due to lower prices for foodstuffs, such as rice, as the harvesting season is boosting supply. While the Bank is confident that inflation will hit its target corridor this year, it will, “keep close watch on a number of risks that could undermine this achievement.”
With respect to the external sector, the Bank explained that the current account showed further improvement in the first quarter of 2014. The trade balance improved as imports contracted by more than exports. The Bank added that capital inflows were strong in April, which led to further accumulation of international reserves. Going forward, the bank expects continued improvements and the current account deficit is forecast to remain below 3.0% of GDP in 2014. Moreover, in terms of currency developments, the Bank noted that improving economic fundamentals have helped stabilize the rupiah exchange rate.
FocusEconomics Consensus Forecast panelists expect the BI rate to average 7.57% at the end of 2014. For 2015, panelists expect the BI rate to end the year at 7.28%.
Author: Carl Kelly, Economist