Indonesia Holds Rates Steady

The Bank Indonesia left its benchmark interest rate on hold at 7.50 percent on August 18th 2015 as widely expected, aiming to protect the rupiah. The lending facility and the deposit facility rate were also left unchanged at 8.0 percent and 5.5 percent respectively.

Policymakers focus on rupiah stability, as they consider the currency is undervalued. Yet, the rupiah lost more than 2.5 percent against the USD to levels not seen since the Asian financial crisis of the late 1990s after China devalued the yuan last week.  

Excerpt from the statement by the Bank Indonesia:

The decision is consonant with efforts to control inflation within the target corridor of 4±1% in 2015 and 2016. In the short term, Bank Indonesia is focused on efforts to stabilize the Rupiah amid uncertainty in the global economy, by optimizing monetary operations in the Rupiah and foreign exchange market. Bank Indonesia constantly strengthens its monetary and macroprudential policy mix in order to ensure macroeconomic stability, particularly exchange rate and financial system stability to bolster economic sustainability. In addition, Bank Indonesia nurtures sound policy coordination with the Government to expedite pro-growth fiscal stimuli and continues various key structural policies to improve the economic outlook of Indonesia.

The rupiah fell by an average of 2.47% (qtq) to a level of Rp13,131 per US dollar in Q2/2015. Pressures on the currency escalated due to investor anticipation of the proposed FFR hike in the United States along with quantitative easing implemented by the ECB and the ongoing fiscal negotiations in Greece. Domestically, demand surged for foreign currencies in order to service debt and disburse seasonal dividend payments during the second quarter of 2015. Pressures were offset, however, by positive sentiment stemming from S&P’s affirmation to raise Indonesia’s outlook rating from stable to positive together with a growing trade surplus. The latest developments have shown that, in line with the market reaction to yuan devaluation in China, nearly all global currencies, including the rupiah, experienced depreciatory pressures (overshoot). Consequently, the rupiah overshot, which left the currency undervalued. Addressing such conditions, Bank Indonesia has and will continue to intervene on the market in order to stabilise the rupiah in accordance with its fundamental value, thereby supporting macroeconomic and financial system stability.

Indonesia Holds Rates Steady

Bank Indonesia | Joana Taborda |
8/18/2015 10:31:08 AM