Indonesia Leaves Monetary Policy Unchanged

Indonesia's central bank kept its benchmark interest rate on hold at 4.75 percent at its May 18th meeting, as widely expected. The overnight deposit facility rate and the lending facility rate were also left unchanged at 4.0 percent and 5.5 percent respectively. Policymakers said inflation remains manageable, but it faces risks, including higher energy costs and a pick up in food prices. Also, economic growth improved in the first quarter, mainly driven by stronger exports and government spending.

Excerpts from Bank Indonesia Press Release: 

The decision is consistent with Bank Indonesia’s efforts to maintain macroeconomic and financial system stability by driving the domestic economic recovery process. Bank Indonesia continues to monitor various global and domestic risks. Globally, the US policy directions and geopolitical conditions, specifically in the Korea Peninsula, are several risks that require vigilance. Domestically, however, the risks include the possible impact of adjustments to administered prices (AP) on inflation, coupled with ongoing consolidation in the banking and corporate sectors. Therefore, Bank Indonesia will continue to optimise its monetary, macroprudential and payment system policy mix in order to maintain macroeconomic and financial system stability. Furthermore, Bank Indonesia will continue to strengthen coordination with the Government to control inflation within the target corridor and accelerate structural reforms to support sustainable economic growth.

Indonesia’s economic growth improved in the first quarter of 2017. Economic growth was recorded at 5.01% in the reporting period, up from 4.94% last period. Export and government expenditure recorded ample growth. Stronger export are mainly caused by the improvement in global commodity prices such as coal and rubber, as well as global economic growth. Government capital dan goods expenditure may improve investment, specifically building investment, as government infrastructure projects continued. Bank Indonesia predicts the domestic economy to grow in the range of 5.0-5.4% (yoy) in 2017, underpinned by stronger export and investment performance as well as tenacious consumption.

Indonesia’s balance of payments recorded another surplus in the first quarter of 2017. Foreign capital flow was large enough to elevate the capital and financial account surplus. The improvement was in line with increased economic growth momentum and investors’ positive perception of the domestic economic outlook. Meanwhile, the current account deficit was recorded at USD2.4 billion on the back of deficits in the oil and gas trade balance and primary income account, which are larger than the increase of non-oil and gas trade. The oil and gas trade deficit expanded as the global oil price increased against a backdrop of less lifting, while the larger primary income account deficit stemmed from higher scheduled interest payments on government debt. 

The rupiah appreciated throughout the first quarter and remained relatively stable in April 2017. Rupiah appreciation was driven by maintained non-resident capital inflows after the sovereign rating outlook was upgraded, solid macroeconomic data was released and positive sentiment regarding the domestic economic outlook prevailed. 

Headline inflation was controlled within the target corridor for 2017, namely 4±1%. The Consumer Price Index (CPI) recorded inflation of 0.09% (mtm) or 4.17% (yoy) in April 2017. Moving forward, Bank Indonesia shall continue to strengthen coordination with the Government to control inflation in the face of several risks, including adjustments to administered prices as part of the Government’s energy reforms, as well as the risk of rising volatile food prices during the approach to the holy fasting month of Ramadan.

Maintained banking industry resilience and stable financial markets continued to support solid financial system. The transmission of easing monetary and macroprudential policy continued to improve, albeit restrained by the banks’ prudence in managing credit risks. Annual credit growth in March was recorded at 9.2%, up from 8.6% the month earlier, boosted by the increase of forex and corporate loans. Furthermore, stronger credit growth is expected to persist as economic activities gain traction.

Indonesia Leaves Monetary Policy Unchanged

Bank of Indonesia | Yekaterina Guchshina |
5/18/2017 11:00:48 AM