Indonesia: Bank Indonesia stands pat in October
October 19, 2017
At its 18 and 19 October monetary policy meeting, Bank Indonesia decided to pause its easing cycle and left the BI seven-day Reverse Repo rate unchanged at 4.25%. The decision met market analysts’ expectations and followed two surprise rate cuts in August and September. The Bank also decided to keep the lending facility rate unchanged at 5.00% and the deposit facility rate stable at 3.50%.
The end of the easing cycle was chiefly due to rising U.S. interest rates, which have eroded the room the Central Bank has to lower the policy rate further. Analysts have already been critical of the Bank’s accommodative stance, as higher interest rates in the U.S. can spark capital outflows from Indonesia, threatening asset stability, and the rupiah depreciated towards the end of September. However, in the context of moderate price pressures, the Central Bank has pursued an accommodative policy to stroke economic momentum. In the accompanying statement, the Bank highlighted that growth was likely higher than expected in Q3 partly due to its easing of monetary policy and it recognized global risks pertaining to tighter monetary policy in the U.S. and the upcoming change of leadership in the Federal Reserve.
The Bank struck a neutral tone regarding future policy and pointed to a period of unchanged interest rates. Specifically, the Bank stated that “the current policy rate is considered adequate to maintain inflation within the target corridor”. Commenting on the Bank’s decision, Euben Paracuelles and Brian Tan, analysts at Nomura, stated that,
“Our forecast [is] for BI to stand pat for the remainder of the year because of rising external risks and improving GDP growth, even if BI expects inflation to remain benign.”