Indonesia Hikes Key Rate by 25 Bps in Expected Move

Bank Indonesia raised its 7-day reverse repurchase rate by 25 bps to 5.75 percent on September 27th, matching expectations. It was the fifth hike in six meetings, in an attempt to support the country's falling currency. The rupiah already weakened nearly 10 percent against the USD since the beginning of the year, reaching its lowest since 1998, amid a higher than expected current account deficit and a continued strengthening of the dollar. The deposit and lending facility rates were also increased by 25 bps to 5 percent and 6.5 percent respectively.

Excerpts from the Bank Indonesia Press Release:

“The decision is consistent with ongoing efforts to lower the current account deficit within a manageable threshold while maintaining the attractiveness of the domestic financial markets, thus further strengthens Indonesia’s external resilience despite widespread global uncertainty. The Government’s seriousness and concrete measures, with Bank Indonesia, to stimulate exports and reduce imports is expected to lower the current account deficit, specifically in 2019, to around 2.5% of GDP. Furthermore, Bank Indonesia will continue to strengthen coordination with the Government and other relevant authorities to maintain economic stability and bolster external resilience. Moving forward, Bank Indonesia will monitor prevailing economic developments, such as the current account deficit, exchange rates, financial system stability and inflation, as follow-up measures to maintain macroeconomic and financial system stability.

The Rupiah has continued to lean against depreciatory pressures, while mitigating volatility. Rupiah depreciation is in line with the currencies of peer countries, spurred by broad US dollar appreciation. Therefore, the Rupiah depreciated by an average of 1.05% in August 2018 but defied pressures in September to close at a level of Rp14,905/USD on 26th September 2018. Year-to-date (ytd), therefore, the Rupiah has lost 8.97% in value against the US dollar as of 26th September 2018, faring better, however, than the Indian rupee, South African rand, Brazilian real and Turkish lira. Moving forward, Bank Indonesia will continue to implement exchange rate stabilisation measures in line with the currency’s fundamental value, while maintaining market mechanisms and financial market deepening efforts. Such policy is aimed to contain Rupiah volatility and liquidity adequacy in the market, to prevent risks on macroeconomic stability and financial system.”

Inflation forecasts remain unchanged at 3.5±1 percent for 2018; and Bank Indonesia projects economic growth in the 5.0-5.4% (yoy) range, subsequently accelerating to 5.1-5.5% (yoy) in 2019.

Indonesia Hikes Key Rate by 25 Bps in Expected Move

Bank Indonesia | Gabriela Costa |
10/2/2018 8:36:11 AM