Statement by the Bank Indonesia:
The Bank Indonesia Board of Governors, convening on 18th November 2014, decided to strengthen its policy mix in response to the Government’s fuel subsidy reform policy.
First, raising the BI rate 25 bps to 7.75%, with an increase of 50 bps on the Lending Facility rate to 8.00% and the Deposit Facility rate to remain unchanged at 5.75%, effective from 19th November 2014. The increase of BI Rate is to anchor inflation expectation and to ensure that inflationary pressures remain under control and temporary, after the subsidized fuel price hike, and that inflation promptly returns towards its target corridor of 4±1% in 2015. The decision is also consistent with the progress in managing current account deficit towards a more sustainable level. The widening of interest rate corridor for monetary operation is intended to manage the liquidity and support financial market deepening.
Second, preparing macroprudential policy adjustments in order to enhance funding resources for banks while promoting financial market deepening, and extending loan to productive sectors. Such policy includes 1) extending the definition for deposits by including securities issued by bank in LDR calculation under LDR-linked RR policy, and 2) providing incentives to foster MSME credit allocation.
Third, strengthening payment system policy to support the smooth expansion of government social assistance program to public in order to tight over the impact of fuel price hikes through the use of electronic money and the implementation of Digital Financial Services (DFS).
Fourth, persisting with rupiah exchange rate stabilization policy in accordance with its fundamental value. Subsidized fuel reform policy is perceived to strengthen market confidence and improve the current account position, which is more conducive to future rupiah fluctuations.
Fifth, strengthening coordination measures with the Government at the central and provincial levels with a focus on efforts to minimise potential inflationary pressures, in particular stemming from rising transportation costs as well as maintaining food prices. Coordination will also be intensified in order to expand fiscal stimuli to productive sectors and further structural reform policy to catalyse economic growth and create employment opportunities.
Bank Indonesia is assured that strengthening its policy mix and tightening coordination with the Government will maintain macroeconomic and financial system stability as well as support sustainable economic growth.
Bank Indonesia welcomes the Government’s fiscal reform policy in order to reallocate the fuel subsidy budget to productive sectors. Despite higher prices in the near term, the policy mix of Bank Indonesia along with tight policy coordination with the Government is expected to control inflationary which is perceived only temporary. The policy is perceived to reduce oil imports and thereby reduce the current account deficit, particularly in terms of the persistently large oil and gas trade deficit. Government policy in terms of social assistance disbursements to the Poor will also offset the potential decline in public purchasing power, which is conducive to private consumption growth. Furthermore, reallocation of the subsidy budget to finance infrastructure development and various productive activities will boost the government’s fiscal capacity in terms of nurturing stronger and more sustainable economic growth. In general, Bank Indonesia projects economic growth in the range of 5.4-5.8% in 2015 and higher in the medium-long term, with maintained macroeconomic and financial system stability.