Bank Indonesia Leaves Interest Rates Unchanged at July Policy Meeting
Contrary to expectations, the central bank of Indonesia (Bank Indonesia) left its monetary policy unchanged at the July policy meeting. The benchmark interest rate (BI rate) was kept at 6.50 percent, while the deposit facility rate and lending facility rate were kept at 4.50 percent and 7.00 percent, respectively. The 7-day reverse repurchase rate, which is set to become the central bank's new benchmark on 19 August 2016 - replacing the BI rate - was left at 5.25 percent.
Considering that Indonesia's capital markets recovered rapidly after Britain decided to exit the European Union (through a referendum on 23 June 2016), while the Federal Reserve is not expected to raise its key rate too soon (due to the higher degree of uncertainty in the globe's financial markets caused by "Brexit"), analysts and investors expected to see a slight (25 basis points) rate cut at today's policy meeting in Jakarta. Moreover, Indonesia's domestic context is conducive with the rupiah having strengthened over 5 percent against the US dollar since the year-start, while inflation and the current account deficit are under control.
However, Bank Indonesia refrained from altering its monetary stance at the July policy meeting as it detected improvements in the transmission of earlier interest rate cuts. Bank Indonesia official Juda Agung added that there remains room for monetary easing in the period ahead.
So far this year, Indonesia's central bank has already cut its key interest rate (BI rate) four times from 7.50 percent at the year-start to 6.50 percent, allowing for accelerated economic growth. Indonesia's economic growth had eased to a six-year low of 4.8 percent (y/y) in 2015.
Next month, Bank Indonesia will adopt the 7-day reverse repurchase rate as the new benchmark as this rate is considered to better transmit monetary policy to the market hence influencing borrowing costs and market liquidity more effectively.
Seven-Day Reverse Repo:
• Enhance effectiveness of monetary policy changes to influence market liquidity
• Replaces the current reference rate (BI rate) that is not directly tied to the money markets
• Encourages lower lending rates of local banks
Meanwhile, Bank Indonesia is optimistic that the government's tax amnesty program will add to the liquidity supply and boost the nation's economic growth. Through this program the government targets to see the repatriation of IDR 1,000 trillion worth of offshore assets into Indonesia. The central bank is a bit less optimistic, however, estimating to see IDR 560 trillion (approx. USD $43 billion) return into Indonesia. The central bank stated that the peak in capital inflows through this program is expected to emerge in December 2016.
Do you think that Indonesia's tax amnesty program will be a success?
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The benchmark stock index of Indonesia (Jakarta Composite Index) immediately fell into red territory after Bank Indonesia's rate decision became known. Throughout the day the index had been in the green zone, partly on speculation that Bank Indonesia would implement another rate cut. At the end of the day the Jakarta Composite Index was down 0.49 percent to 5,216.97 points.