Indonesia Unexpectedly Raises Key Interest Rate to 6%

Bank Indonesia unexpectedly raised its 7-day reverse repurchase rate by 25 bps to 6 percent on November 15th meeting, after trade balance posted a gap in October. Policymakers said the decision to increase the tightening was consistent with efforts to reduce the current account gap to a more healthy limit of around 2.5% of GDP in 2019, anticipating a rise on global interest rates in the upcoming months, and a continued stabilizing of rupiah. The lending and the deposit facility rates were also raised by 25 bps to 6.75 percent and 5.25 percent respectively.

Excerpts from the Bank Indonesia Press Release:

The decision reflects Bank Indonesia’s ongoing efforts to lower current account deficit within a manageable threshold. The policy rate hike is also aimed at strengthening the attractiveness of domestic financial markets by anticipating global policy rate hike in the next few months. In order to maintain flexibility and distribution of liquidity in the banking industry, Bank Indonesia raised the average reserve requirement (conventional and sharia) from 2% to 3%, as well as raising the macroprudential liquidity buffer (conventional and sharia) that can be repoed to Bank Indonesia, from 2% to 4%, each from deposit. Furthermore, Bank Indonesia has decided to maintain macroprudential policy without adjusting the countercyclical capital buffer (CCyB), namely remaining at 0%, and the Macroprudential Intermediation Ratio (MIR) in the 80-92% target range. Moving forward, Bank Indonesia will optimise its policy mix to safeguard macroeconomic and financial system stability, while strengthening policy coordination with the Government and other relevant authorities to maintain economic stability and bolster external resilience, which includes reducing the current account deficit to around 2.5% of GDP in 2019. The policy mix instituted by Bank Indonesia and the Government is expected to effectively dampen the impact of global economic gyrations by leaning against the global headwinds in order to maintain domestic economic resilience.

Bank Indonesia has also introduced rules for Rupiah interest rate derivatives, namely Interest Rate Swaps (IRS) and Overnight Index Swaps (OIS), in order to expedite further financial market deepening. This will provide alternative hedging instruments against domestic interest rate fluctuations. With the publication of IndONIA and efforts to strengthen JIBOR credibility, the policy is expected to produce transparent yield curves for the money market and bond market, while also strengthening monetary policy transmission and deepening the government and corporate bond markets. Details of the rules for Rupiah interest rate derivatives is in the attached document.

The Rupiah succumbed to depreciatory pressures in the third quarter of 2018 and during October 2018 before rebounding in November 2018. Point to point, the Rupiah depreciated 3.84% in the third quarter of 2018 and by 1.98% in October 2018 as a corollary of global economic uncertainty. The Rupiah rebounded in November 2018, however, due to foreign capital inflows to the country, drawn by conducive domestic economic dynamics and financial market policy, as well as positive sentiment surrounding the midterm elections in the US. The foreign capital inflows affected all financial assets, including the stock market. As of 14th November 2018, the Rupiah had depreciated by 8.25% (ytd) this year, which is less than the depreciation experienced in Turkey, South Africa, India and Brazil. Bank Indonesia will remain vigilant of global financial market uncertainty, while continuing to stabilise Rupiah exchange rates in line with the currency’s fundamental value and maintaining market mechanisms, backed by financial market deepening efforts.

For 2018, the central bank expects the economy to grow by 5.1 percent while inflation is projected at around 3.2 percent.

Indonesia Unexpectedly Raises Key Interest Rate to 6%

Bank Indonesia l Chusnul Ch Manan |
11/15/2018 10:40:02 AM