Indonesia Cuts Key Rate to 5%


The Bank Indonesia lowered its benchmark interest rate by 25 bps to 5 percent at its September 22nd, 2016 meeting, as widely expected. The lending facility rate and overnight deposit facility rate were also cut by 25 bps to 4.25 percent and to 5.75 percent. Policymakers said the decision was in line with continued macroeconomic stability, low inflation and relatively stable exchange rate.

Excerpt from the statement by the Bank Indonesia:


The ongoing macroeconomic stability, as evidenced by low inflation, a controlled current account deficit and relatively stable exchange rates, encouraged Bank Indonesia to ease monetary policy by lowering the BI 7-Day RR Rate. Against a sluggish global economic backdrop, the eased monetary policy stance adopted by Bank Indonesia is expected to strengthen efforts to boost domestic demand, thereby maintaining economic growth momentum while preserving macroeconomic stability. Bank Indonesia believes that by easing monetary policy, government efforts to stimulate sustainable growth through accelerated structural reforms will be strengthened. Furthermore, Bank Indonesia will continue to coordinate with the Government in preparing policy measures to ensure an optimal impact of the recently enacted Tax Amnesty on the national economy.

Domestic economic growth in Q-3 is still maintained, albeit not as strong as previously projected. Various indicators show signs of solid household consumption, while non-construction investment has not shown any significant signs of improvement. Private investors remain muted in line with consolidations in the private sector in response to demand that has not yet fully recovered. Meanwhile, Bank Indonesia expects limited fiscal stimuli as the Government adjusts spending in the second half of the year. In terms of the external sector, Bank Indonesia also forecasts the sluggish global economy and world trade to restrain export gains despite indications that prices of several export commodities have started to rebound. Consequently, Bank Indonesia acknowledges the pressing need for various measures to boost domestic demand and, thus, reinforce economic growth momentum. Therefore, economic growth for 2016 is predicted in the 4.9-5.3% range.

Limited rupiah depreciation was observed in August 2016, before rebounding thereafter in September. Accordingly, the rupiah depreciated by an average of 0.39% in the reporting month to a level of Rp13,163 per USD. Negative external sentiment concerning the timing of the proposed FFR hike after the minutes of the July Federal Open Market Committee (FOMC) were released precipitated rupiah depreciation. Nonetheless, the rupiah was observed to rebound 0.8% in the middle of September. The rebound was prompted by an increase in foreign capital as the negative sentiment surrounding FFR hike timing eased, as well as the ongoing implementation of Tax Amnesty.

Inflation remained low and is projected within the target corridor set for 2016, namely 4±1%. Milder inflationary pressures were reported after Eid-ul-Fitr this year, with deflation of 0.02% (mtm) recorded in August 2016, which is the lowest rate after Eid-ul-Fitr for the past five years, when inflation is typically considered the norm. Consequently, headline inflation was recorded at 1.74% (ytd) or 2.79% (yoy). Consequently, Bank Indonesia predicts inflation near the floor of the target corridor for 2016.

Bank Indonesia | Yekaterina Guchshina | yekaterina@tradingeconomics.com
9/22/2016 11:24:25 AM