Analyst Opinion: Bank Indonesia's Interest Rate Might Be Raised Again
According to Fauzi Ichsan, Managing Director at Bank Standard Chartered Indonesia, there is a possibility that Indonesia's central bank (Bank Indonesia) will raise its benchmark interest rate (BI rate) from 7.50 percent to 8 percent at the next Board of Governor's Meeting as the country's current account deficit has not improved markedly yet. The deficit stood at about 3.5 percent of the country's gross domestic product (GDP) at the end of 2013. Bank Indonesia intends to lower the deficit to a sustainable level of below 3 percent in 2014.
One of the (monetary) measures that can be taken to improve the trade balance is raising the interest rate as this will curb imports. One important side-effect of a more healthy trade balance is currency stabilization. Indonesia's rupiah exchange rate has weakened significantly against the US dollar in 2013 after international investors pulled funds away from the lucrative and more riskier assets in emerging economies in anticipation of the looming end of the Federal Reserve's bond-buying program (quantitative easing).
Emerging economies that were most vulnerable to these capital outflows were those that showed financial weaknesses such as a wide current account deficit. Indonesia recorded a record current account deficit in the second quarter of 2013 (USD $9.9 billion or 4.4 percent of GDP). Due to financial reforms and the sharply depreciated rupiah exchange rate (which made imports more expensive), the deficit eased to USD $8.4 billion (3.8 percent of GDP) in the third quarter of 2013, and to 3.5 percent of GDP at the year-end.
However, in 2014 pressures on Indonesia's current account deficit are expected to increase as the new mining law (2009 Mining Law) has taken effect since 12 January 2014. Although a last-minute revision means that the law is not implemented in full force yet, it does seriously reduce exports of unprocessed minerals and thus causes a slowdown of exports. The value of Indonesia's exports is expected to decline by about USD $5 billion due to the export ban.
Several other countries that are plagued by a wide current account deficit have also raised interest rates (Brazil and India) as this measure is assessed appropriate in order to safeguard the economy amid global uncertain conditions.
Further Reading:
• Export Ban Influence, Indonesia's Trade Balance May Record Surplus by 2017
• Indonesia's Trade and Inflation Data Cause Positive Start of the Year
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