Indonesia Cuts Key Rate to 6.75%

Indonesia's central bank cut its benchmark interest rate by 25 basis points to 6.75 percent at its March 17th meeting, as expected. It was the third rate adjustment in a row aiming to support the weak economy. Bank Indonesia also slashed its overnight deposit facility rate and lending facility rate by 25 basis points to 4.75 percent and 7.25 percent respectively.

Excerpt from the statement by the Bank Indonesia:

The move is consistent with greater room to ease monetary policy along with a solid macroeconomic stability, specifically indicated by the persistently less intense inflationary pressures in 2016 and 2017, while uncertainties in the global financial market decreased. Amid a sluggish global economic growth, the lower BI Rate is expected to enhance domestic demand to bolster economic growth momentum, while maintaining macroeconomic stability. The Board of Governors will be cautious in determining future monetary easing, taking into account overall assessments and forecast of domestic macroeconomy and financial systems stability, as well as global economic developments. To enhance the effects of policy transmission, future focus on the short term are on strengthening operational framework through a consistent term structure of monetary operations. Furthermore, Bank Indonesia will also continue to strengthen coordination with the Government to control inflation, support growth stimuli and ensure structural reforms remain on track, thereby underpinning sustainable economic growth moving forward.

Domestic economic growth has a potential to continue improving throughout the first quarter of 2016 on the coattails of fiscal stimuli acceleration. Economic growth in Q1/2016 is predicted to surpass that posted in the previous period, supported by government consumption and investment.The increased government investment was bolstered by government capital spendings which were accelerated during the first two months of 2016, while the private sector investment is not expected tp increase until future periods. Household consumption remains strong, as reflected by the adequate purchasing power, increased retail sales, and relatively good consumer confidence. Meanwhile, pressures on export will persist in line with global economic moderation and sliding international commodity prices. For 2016, therefore, economic growth is projected in the 5.2-5.6% (yoy) range, exceeding that achieved the year earlier.

The deluge of foreign capital inflows and a decrease of foreign exchange demand in the domestic market prompted Rupiah appreciation. In February 2016, the Rupiah appreciated 3.09% (ytd) to a level of Rp13,372 per USD. The Rupiah appreciation trend was bolstered by inflows of foreign capital, including to the stock market. On the home front, the Rupiah appreciated on the positive perception of investors concerning the promising economic outlook after the BI Rate was lowered, the government introduced policy packages aimed at improving the investment climate and the effective implementation of infrastructure projects. 

Inflation in February remained under control, thereby supporting achievement of the inflation target in 2016 at 4±1%. The Consumer Price Index (CPI) recorded deflation of 0.09% (mtm) in the reporting period, supported by deflation in both administered prices and volatile foods. Going forward, the downward oil price trend is expected to further alleviate inflationary pressures. Bank Indonesia projects inflation to stay within the target corridor in 2016, namely 4±1%.

Indonesia Cuts Key Rate to 6.75%

Bank Indonesia | Yekaterina Guchshina |
3/17/2016 4:06:30 PM