Indonesia: BI leaves rates unchanged in January as currency pressures ease
At its 16–17 January monetary policy meeting, Bank Indonesia (BI) left the seven-day reverse repo rate at 6.00% for the second 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.
The Bank’s decision to stay put came as pressure on the rupiah—which lost considerable value in the first ten months of 2018—has ebbed noticeably in the last few months, with the currency trading at slightly over IDR 14,000 per USD in mid-January. Currency strengthening has come on the back of higher interest rates and reduced global uncertainty, which led to an influx of foreign capital in December and early January. Moreover, inflation is subdued as a result of government price controls and the recent fall in oil prices. As a result, neither external nor internal factors compelled the Bank to tighten its stance further.
Bank Indonesia did not provide any explicit forward guidance in its communiqué, although governor Perry Warjiyo recently stated that interest rates have almost reached their peak, despite making clear the Bank remains “hawkish”. With inflation set to remain within the Bank’s 2.5%-4.5% target range going forward, future monetary developments are likely to be driven largely by external factors, particularly the evolution of the rupiah and monetary developments in the United States. The U.S. Federal Reserve’s recent shift to a more dovish stance reduces the need for further monetary tightening by BI.
The next monetary policy meeting will be held on 20-21 February.