Indonesia: BI hikes rates for the first time in four years in May
At its 17 and 18 May monetary policy meeting, Bank Indonesia decided to increase interest rates by 25 basis points, the first hike since November 2014, in a move aimed to ensure economic stability. The Bank brought the BI seven-day Reverse Repo rate to 4.50%, while the lending facility rate was raised to 5.25% and the deposit facility rate to 3.75%. Market expectations had been mixed, but the majority of our panelists had expected a rate hike.
The Bank chose to raise interest rates to support economic stability amid volatility in global financial markets and the depreciation of the rupiah. Economic growth in Q1 was a healthy 5.1% year-on-year, buttressed by robust investment growth and private consumption. The figure was broadly in line with the Central Bank’s target range of growth between 5.1% and 5.5% in 2018. Furthermore, April’s headline inflation of 3.4% stood comfortably within Bank Indonesia’s target range of 3.5% plus or minus 1.0%. That said, external dynamics are intensifying downside risks to economic growth. Indonesia has suffered capital outflows as advanced countries normalize interest rates and U.S. treasury yields are on the rise. In addition, the strengthening of the U.S. dollar contributed to a weaker rupiah in the first quarter. In light of these external developments, the Bank deemed a rate hike appropriate to help counteract external pressures.
The tone of its communiqué was notably more hawkish. The Bank stated in the press release it was “prepared to take stronger measures to ensure macroeconomic stability”, hinting additional rate hikes are not out of the question.
The next monetary policy meeting will be held on 27 and 28 June.