Indonesia: Bank Indonesia makes tenth consecutive decision to maintain rates
September 11, 2014
At its 11 September monetary policy meeting, the Central Bank decided to keep the BI policy rate at 7.50% for a tenth consecutive time. The decision was in line with market expectations and came amid ongoing weak growth momentum and downward inflationary pressures. 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 economic growth continues to remain moderate, with household consumption on a downward trend and limited investment growth. The Bank expects government spending to pick up in the second half of the year. Meanwhile, the export sector continues to suffer due to sluggish external demand. The Bank foresees that growth in 2014 will remain in line with its previous projection of 5.1%-5-5%, although with a tendency toward the lower end of this range.
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 efforts 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 eased in August, with both monthly and annual figures registering declines. Price pressures subsided due to the end of the Ramadan season. However, questions loom regarding the potential effect on inflation of a cut in government fuel subsidies. President-elect Joko Widodo takes office on 20 October and is widely expected to being cutting fuel subsidies, which are a huge burden on government finances.
With respect to the external sector, the Bank noted that the trade balance returned to surplus in July. A growing surplus in non-oil trade is offsetting the oil and gas trade deficit. Going forward, the Bank expects the trade balance to be bolstered by an increase in exports as the government relaxes its ban on mineral exports. In terms of currency developments, the Bank noted that the rupiah has depreciated slightly due to external geo-political and monetary dynamics, as well as uncertainty regarding future government policies, but currency volatility has mitigated.
Author: Carl Kelly, Economist