Indonesia Leaves Monetary Policy Unchanged

The Bank Indonesia left its benchmark interest rate on hold at 7.5 percent at its April 2015 meeting, saying current policy stance is consistent with bringing inflation to target and controlling current account gap.

The decision was widely expected by markets. The lending facility and the deposit facility rate were also left unchanged at 8.0 percent and 5.5 percent respectively.

In November last year, the central bank raised the benchmark interest rate by 25 bps to 7.75 percent aiming to contain the inflation after the government increased fuel prices more than 30 percent. However, it cut it back to 7.5 percent in February 2015.

Excerpts from the statement by the Bank Indonesia:

This decision is in line with the ongoing efforts to keep inflation within the target of 4±1% for 2015 and 2016, and to control current account deficit towards a healthier level at 2.5-3% of GDP in the medium term. Bank Indonesia will remain vigilant of domestic and external risks; while consistently strengthen the monetary and macroprudential policy mix, which includes stabilizing the rupiah to maintain macroeconomic and financial system stability. Furthermore, coordination with the Government will also be strengthened to control inflation and the current account deficit as well as to accelerate structural reforms. To this end, Bank Indonesia supports government-led measures to reinforce macroeconomic stability by continuing a variety of structural reforms, including efforts to improve the current account position and expedite various infrastructure projects to stimulate sustainable growth.

From a domestic standpoint, first-quarter growth in Indonesia was moderate, with a rebound forecasted in the second quarter of 2015. Consumption was expected strong in the first quarter, while investment and exports indicated a slowdown. A surge in private consumption due to controlled inflation helped maintain a strong consumption. The Government expenditure, expected to accelerate growth, was anticipated to grow, albeit limited, in line with seasonal trends at the beginning of the year and will increase starting the second quarter of 2015. Exports continued to contract, despite early signs of improvement, in line with low commodity prices and sluggish global demand, particularly for manufactured products. Investment growth was stifled but is projected to pick up in the second quarter of 2015 and thereafter as government capital spending on infrastructure projects spikes. This is also in line with the monitoring of construction progress in various infrastructure projects. Looking ahead, there is a risk that the economy in 2015 may grow slower, nearing the lower end of the 5.4-5.8% range. This will be determined by the vast and promptness of Government infrastructure projects realization, along with resilient consumption and gradually improving exports.

Moving ahead, Bank Indonesia will consistently maintain rupiah stability in line with its fundamental value.

Indonesia Leaves Monetary Policy Unchanged

Bank Indonesia | Joana Taborda |
4/14/2015 11:50:49 AM