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Indonesia Monetary Policy February

Indonesia: BI leaves rates unchanged in February on stronger rupiah

At its 20–21 February monetary policy meeting, Bank Indonesia (BI) left the seven-day reverse repo rate at 6.00% for the third consecutive meeting, in line with market expectations. In addition, the Bank left the deposit facility rate and lending facility rate at 5.25% and 6.75%, respectively. BI also announced yet-to-be-determined macroprudential measures to boost the economy and compensate for the significant monetary tightening observed throughout 2018.

The Bank’s decision to stay put came as the rupiah—which lost considerable value in the first 10 months of 2018—has strengthened notably recently, briefly dipping below IDR 14,000 per USD in early February. The appreciation has come on the back of reduced global uncertainty and the U.S. Federal Reserve’s shift to a more dovish monetary stance, which has dampened capital outflows from emerging markets. On the domestic front, price pressures are subdued amid government price controls and lower oil prices. As a result, neither external nor internal factors compelled the Bank to tighten its stance.

Bank Indonesia did not provide any explicit forward guidance in its communiqué, although rates are unlikely to rise much further from their current level this year, as a more dovish Fed will reduce the pressure on BI to tighten its stance. On the other hand, the Bank is unlikely to begin cutting rates yet either, as it remains concerned about the sizeable current account deficit.

Regarding the outlook for the exchange rate, analysts at Nomura comment: “Little dovishness at today’s BI meeting and the continued focus on external stability are positive for IDR […] while steps/co-ordination to reduce the [current account deficit] should provide added tailwinds.”

The next monetary policy meeting will be held on 20-21 March.

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