Bank Indonesia Cuts Rate for the 1st Time in A Year

Indonesia's central bank decided to cut its benchmark interest rate by 25 basis points to 7.25 percent at its January, 14th meeting. It is the first rate adjustment since February, as policymakers seek to support the weak economy. Bank Indonesia also slashed its overnight deposit facility rate and lending facility rate by 25 basis points to 5.25 percent and 7.75 percent respectively.

Excerpt from the statement by the Bank Indonesia:

The decision was in line with Bank Indonesia’s prior statements that room for monetary easing exists on the back of solid macroeconomic stability, taking into consideration the reduced global uncertainty post-FFR hike. The reduction of the BI Rate is expected to support previous macroprudential policy easing and the lowering of primary reserves in rupiah. Further easing will take place after rigorous assessments of the domestic and global economy, while maintaining macroeconomic and financial system stability. Bank Indonesia will also strengthen coordination with the Government to control inflation, catalyse growth and accelerate structural reforms, thus supporting sustainable economic growth.

Economic growth in Q4/2015 did not improve significantly, despite fiscal stimuli and macroprudential policy relaxation. Dwindling global demand and low commodity prices undermined exports. Domestic economic growth was recorded on the back of government consumption and greater investment, as government spending accelerated and more infrastructure projects were implemented. Private consumption remains stable, amidst indications of decreased savings and less disposable income. Private investment remains weak, following a decrease in commodity based-corporate performance and excess production capacity due to the domestic economic slowdown.

The Indonesia balance of payments is expected to improve in Q4/2015, supported by a capital and financial account surplus. The capital and financial account recorded a broader surplus as portfolio investment in government bonds, including global bonds, and other investments surged. Meanwhile, the current account deficit in 2015 is expected to improve from 3.1% to around 2% of GDP.

The rupiah appreciated in December 2015 as uncertainty on global financial markets eased. Despite depreciating on average, point-to-point (ptp) the rupiah appreciated 0.36% (mtm) to a level of Rp13,785 per USD. Less uncertainty on global financial markets after the Fed hiked its Federal Funds Rate on 17th December 2015 increased non-resident funds to government bonds. Looking forward, Bank Indonesia will remain vigilant towards global developments, specifically China’s economy and international commodity prices, while keeping the Rupiah exchange rate in line with the currency’s fundamental value.

Inflation in 2015 was recorded at 3.35% (yoy), which is below that posted in 2014 but within the target corridor set by the government at 4±1%(yoy). Low inflation was attributed to Government and Bank Indonesia policy to control inflation, encompassing solid coordination between the national and regional inflation control teams. Consequently, inflation is projected to hit the target of 4±1% in 2016-2017 and 3.5±1% in 2018.

Bank Indonesia Cuts Rate for the 1st Time in A Year

Yekaterina Guchshina |
1/14/2016 9:23:48 AM