Indonesia Leaves Monetary Policy Unchanged

The central bank of Indonesia held its benchmark 7-day reverse repo rate at 5.25 percent on July 19th as widely expected. It follows three consecutive rate hikes to support the rupiah which already fell almost 6 percent in 2018 and is trading at its weakest level in near three years. However, the currency has been stable since the end of June when policymakers last hike borrowing costs by 50bps.
Bank Indonesia | Gabriela Costa | 7/19/2018 9:59:25 AM
The lending and the deposit facility rates were also left steady at 6 percent and 4.5 percent, respectively.

Excerpts from the Bank Indonesia Press Release:

“The policy is consistent with efforts by Bank Indonesia to maintain domestic financial market attractiveness against a backdrop of pervasive uncertainty blighting the global financial markets in order to maintain stability in general and Rupiah exchange rate stability in particular. Bank Indonesia believes that the macro prudential policy easing measures are able to increase liquidity management flexibility as well as banking intermediation for economic growth. Bank Indonesia also strengthens coordination with the government and other related authorities to maintain stability and implementation of structural reform to reduce current account deficit, including foreign exchange from tourism and private sector infrastructure financing. Moving forward, Bank Indonesia will continue to monitor the global and domestic economic developments and outlook in order to strengthen policy mix response in maintaining domestic financial market attractiveness.

The Rupiah experienced depreciatory pressures against broad USD appreciation. The Rupiah strengthened at the beginning of July 2018 in response to Bank Indonesia’s pre-emptive, front-loading and ahead-of-the-curve monetary policy instituted at the Board of Governors’ meeting (RDG) held in June 2018 through a 50bps hike in the BI 7-Day (Reverse) Repo Rate. The favorable market response drew non-resident capital inflows to domestic financial markets, especially tradable government securities (SBN), thus prompting Rupiah appreciation. Pressures on the Rupiah re-emerged as uncertainty enveloped the global financial markets, which triggered broad USD appreciation. On 18th July 2018, the Rupiah stood at Rp14,405/USD, down 0.52% (ptp) on the level recorded at the end of June 2018. Consequently, the Rupiah has depreciated by 5.81% (ytd) on the level posted at the end of 2017, not as severe as reported in other developing economies, including the Philippines, India, South Africa, Brazil and Turkey. Moving forward, Bank Indonesia will remain vigilant of global financial market uncertainty risks, while maintaining the Rupiah exchange rate in line with the currency’s fundamental value, backed by financial market deepening efforts. The policies remain backed by double intervention strategies and monetary operation strategies to maintain adequate liquidity, especially in the Rupiah and interbank swap markets.”

Inflation (3.5±1 percent) and economic growth (5.1-5.5%) forecasts for 2018 were kept unchanged.

Indonesia Leaves Monetary Policy Unchanged