Indonesia: Bank Indonesia raises policy rate to 7.25% in September
September 12, 2013
The Central Bank decided to increase the BI policy rate by 25 basis points to 7.25% at its 12 September monetary policy meeting. The decision came as a surprise as the majority of economists had not expected a change. Moreover, this increase followed a hike of 50 basis points which was announced at the Bank's extraordinary meeting on 29 August. The BI policy rate now stands at the highest level since May 2009. The Bank also increased the deposit facility rate and the lending facility rate at the two recent meetings; the rates now stand at 5.50% and 7.25%, respectively. With reserves dwindling, the Bank announced a bilateral swap deal with the Bank of Japan valued at USD 12 billion.
Bank Indonesia stated that it made these decisions in order to support its broader policy goals of, "controlling inflation, stabilizing the rupiah exchange rate and ensuring the current account deficit is managed to a sustainable level." The Central Bank reiterated that it expects its policy mix to be effective in directing 2014 inflation toward the target of 4.5% (plus/minus 1.0%). The Bank also foresees continued sluggishness in the domestic economy fueled in part by developments at the global level. In fact, the Bank has revised down its growth projections for 2013 to 5.5%-5.9% (previously expected: 5.8%-6.2%) and 5.8%-6.2% for 2014 (previously expected: 6.0%-6.4%).
FocusEconomics Consensus Forecast panellists expect the BI rate to average 6.59% by the end of 2013. For 2014, panellists expect the BI rate to remain virtually unchanged, ending the year at 6.50%.
Author: Carl Kelly, Economist