Indonesia Unexpectedly Keeps Rates on Hold

Indonesia's central bank left its benchmark interest rate unchanged at 6.5 percent at its July 21st 2016 meeting, following a 25bps cut last month, disappointing markets who expected another 25 bps cut. The overnight deposit facility rate and the lending facility were also left on hold at 4.5 percent and 7 percent, respectively. Policymakers already lowered rates four times so far this year, aiming to boost growth.

Excerpt from the statement by the Bank Indonesia:

Bank Indonesia believes that the macroeconomic stability remains stable, as reflected by low and stable inflation within the target corridor of 4±1%, a healthier current account deficit and relatively stable exchange rate. Monetary policy transmission through interest rate has continued to improve. Preparations for policy rate reformulation, which will come to effect on 19 August 2016, are underway. Moving forward, Bank Indonesia is assured that looser monetary and macroprudential policies will bolster economic growth momentum.

Bank Indonesia supports the implementation of the 2016 Tax Amnesty Law. The policy is expected to boost government’s fiscal capacity to finance development programs as well as potentially enhance national economic liquidity, which will then be utilized domestically for productive economic activities. Bank Indonesia will continue to conduct financial market deepening by introducing new investment and hedging products in the financial market, strenghten monetary management strategies, and encourage the real sector to make optimal use of repatriation funds. Bank Indonesia will also continue to coordinate with the government to ensure that the implementation of the Tax Amnesty Law, including the repatriation funds, can be beneficial to the national economy.

On the domestic front, national economic growth gained traction but remained limited in the second quarter of 2016. Household consumption was observed to improve, indicated by positive retail sales data during the approach to Eid-ul-Fitr and stronger car sales. Furthermore, investment growth, particularly non-construction investment, showed significant signs of improvement against a backdrop of government capital spending and procurement. In terms of the external sector, exports remained weak despite several commodities showing early signs of recovery. Moreover, economic growth in the upcoming periods is predicted to continue gaining momentum on the back of loose monetary and macroprudential policy, coupled with fiscal stimuli in the form of the tax amnesty bill along with a government inclined to spend. Consequently, Bank Indonesia projects economic growth for 2016 in the 5.0-5.4% range.

The rupiah strengthened in June 2016 as uncertainty surrounding the proposed FFR hike eased, the limited effect of Brexit and positive sentiment increased on the tax amnesty bill. Point-to-point, the rupiah appreciated by an average of 3.4% (mtm) to a level of Rp13,213 per USD in June 2016. The impact of the Brexit on the rupiah was limited compared to other currencies and only temporary. The rupiah quickly rebounded on the positive perceptions held by investors concerning the domestic economic outlook in line with the ratification of the Tax Amnesty Act, improved macroeconomic stability and the expected delay to the FFR hike by the Federal Reserve. The rupiah also appreciated as non-resident capital inflows surged after a slight correction due to the Brexit. Bank Indonesia will continue, however, to maintain exchange rate stability in line with rupiah’s fundamental value.

Headline inflation during the holy fasting month of Ramadan remained relatively under control, supporting the 2016 inflation to stay within the target corridor of 4±1%. Inflation in June 2016 was recorded at 0.66% (mtm) or 3.45% (yoy), which is the lowest rate during Ramadan for the past four years due to the various policies instituted by the Government, coupled with close coordination between the Government and Bank Indonesia. 

Indonesia Unexpectedly Keeps Rates on Hold

Bank Indonesia | Mojdeh Kazemi |
7/21/2016 12:27:44 PM