Indonesia Hikes Key Rate for Second Time in 2 Weeks

The central bank of Indonesia increased its benchmark 7-day reverse repo rate by 25bps to 4.75 percent at an out-of-cycle meeting on May 30th 2018. It was the first extra policy meeting since 2014 and the second rate hike in two weeks, as the central bank seeks to support the falling rupiah and strengthen stability. Policymakers said overall economic conditions in Indonesia are strong although geopolitical risks, global uncertainty and prospects of rate hikes in the US have been adding pressure.

The lending and the deposit facility rates were also increased by 25bps to 5.5 percent and 4 percent respectively.

Excerpts from the Bank Indonesia Press Release:

"The decision to raise policy rate is part of Bank Indonesia’s short term policy, which prioritise stability in monetary policy, especially for the Rupiah exchange rate. First, a pre-emptive, ahead-of-the-curve and front-loading policy rate response will be taken to stabilise the rupiah exchange rate. Second, Bank Indonesia will continue to optimise dual intervention in the foreign exchange market and government securities market to stabilise rupiah exchange rates, adjust fair prices in the financial markets and maintain adequate liquidity in the money market. Third, the monetary operations strategy will be oriented towards maintaining adequate liquidity in the rupiah money market and interbank swap market. Fourth, intensive communication with market players, the banking industry, business community and economists will be used to form rational expectations, thus helping to mitigate the rupiah overshooting the currency’s fundamental level.

The pressures on stability, particularly in the Rupiah exchange rate, tend to originate from policy change in the United States (US) which affects all countries, including Indonesia. Global financial market uncertainty has also escalated, triggered by the looming US-China trade war, coupled with simmering regional geopolitical tensions. Prevailing global developments have prompted a foreign capital outflow and amplified pressures on financial markets in advanced economies and emerging market economies (EMEs), including Indonesia, manifesting in lower stock prices, higher bond yields and exchange rate depreciation against the US dollar."

Nevertheless, domestic economic growth remains strong, backed by increasing investment in buildings and non-construction sectors. Also, the current account deficit narrowed from the previous quarter, and is expected to remain below 2.5 percent of the GDP in 2018.

Inflation forecasts (3.5±1 percent) for 2018 were kept unchanged.

Indonesia Hikes Key Rate for Second Time in 2 Weeks

Bank Indonesia | Gabriela Costa |
5/30/2018 2:48:31 PM