Indonesia Leaves Rates Steady

The Bank Indonesia left its benchmark 7-day reverse repo rate unchanged at 4.75 percent on June 15th 2017, in line with market expectations. The overnight deposit facility rate and the lending facility rate were also left steady at 4 percent and 5.5 percent respectively, saying the decision is consistent with efforts to maintain macroeconomic and financial stability. The central bank mentioned several domestic and external risks to the economic outlook including the further rise of the Fed Funds Rate and the planned decline in its balance sheet; the results of the General Elections in the UK; the potential for declining commodity prices; the effects of administered prices on inflation and the continued consolidation of corporations and banks.
Bank Indonesia | Joana Taborda | 6/15/2017 12:12:59 PM
Excerpts from the Bank Indonesia Press Release: 

The BI Board of Governors agreed on 14th and 15th June 2017 to hold the BI 7-day (Reverse) Repo Rate (BI-7 day RR Rate) at 4.75%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 4.00% and 5.50% respectively, effective 16th June 2017. The decision is consistent with Bank Indonesia’s efforts to maintain macroeconomic and financial system stability, while supporting a continuous domestic economic recovery. Bank Indonesia continues to monitor various global and domestic risks. Globally, the FFR hike and the Fed’s plan to unwind its large balance sheet, results of the UK election, and the potential decrease in commodity prices, especially oil, are the salient risks that demand vigilance. At home, however, the risks include the impact of adjusting administered prices (AP) on inflation, coupled with ongoing consolidation in the corporate and banking sectors. Therefore, Bank Indonesia shall continue to optimise its monetary, macroprudential and payment system policy mix to maintain macroeconomic and financial system stability. Furthermore, Bank Indonesia shall also continue to strengthen coordination with the Government to control inflation within the target corridor and support ongoing structural reforms towards sustainable economic growth.

The global economy is improving as projected, despite several risks that must be monitored. The global economic outlook is improving in line with favourable economic developments in the United States, China, Europe and Japan. Stronger consumption, investment and improving labour indicators have boosted US economic momentum, while in China the economy is expanding on the back of government and private sector investment. On the other hand, the uptick in growth in Europe and Japan was driven by exports and domestic demand. Congruent with faster global economic growth, world trade volume was also observed to accelerate. Meanwhile, high international commodity prices are expected to persist but with potential downside risks linked to abundant supply that is outstripping the limited demand. Bank Indonesia believes that the FFR hike on 14th June 2017 has been anticipated, enabling Indonesia’s financial market to remain conducive, supported by positive perception of macroeconomic management and Indonesia’s fundamental conditions. Moving forward, the global risks require close monitoring, including further FFR hikes and the Fed’s plan to shed its large balance sheet as well as geopolitical tensions in various regions of the world.

Bank Indonesia predicts 2017 domestic economic growth in the 5.0-5.4% range, supported by accelerating exports and investment performance as well as resilient household consumption.

Indonesia’s balance of payments (BOP) is set to record another surplus in Q2/2017, supported by a capital and financial account surplus. Furthermore, the current account deficit is expected to remain under control at a healthy level. 

Looking forward, foreign capital inflows, both in FDI and portfolio investment, are expected to continue along with government structural reform and investor confidence in the national economic outlook. Nevertheless, Bank Indonesia shall continue to stabilise rupiah exchange rates in line with the currency’s fundamental value, while maintaining market mechanisms.

Moving forward, Bank Indonesia will control inflation within the target corridor for 2017, namely 4±1%. To that end, policy coordination to control inflation between the central government, regional administrations and Bank Indonesia must be strengthened to handle soaring volatile food prices during the holy fasting month and Eid-ul-Fitr.

Indonesia Leaves Rates Steady