Bank Indonesia Kept Interest Rates Unchanged on Capital Outflow Risk
The central bank of Indonesia (Bank Indonesia) decided to leave its interest rate environment unchanged at the January 2017 policy meeting on Thursday (19/01). The benchmark seven-day reverse repurchase rate (BI 7-day RR Rate) was kept at 4.75 percent, while the Deposit Facility and Lending Facility rates were maintained at 4.00 percent and 5.50 percent, respectively. The decisions of Bank Indonesia are in line with analysts' forecasts. Due to risks of capital outflows Indonesia's central bank had few room to ease monetary policy.
While Indonesia's inflation rate is under control at 3.02 percent year-on-year (y/y) in December 2016 and the rupiah exchange rate stabilized after a hectic November 2016 (when, against expectations, Donald Trump managed to win the 2016 US presidential election, an event that immediately prompted major capital outflows from emerging markets), the prospect of further monetary tightening in the USA puts pressure on emerging-market currencies, including the rupiah.
Bank Indonesia said it sees several risks: (1) uncertain policy directions in the USA and China, (2) the direction of the global oil price, and (3) the impact of administered price adjustments (particularly electricity tariffs that are revised by Indonesia's central government) on inflation in Indonesia. Regarding uncertainty about the US policy direction, Bank Indonesia stated that US fiscal policies can have a negative impact on international trade, while a Federal Funds Rate (FFR) hike could raise the cost of borrowing.
In 2016 the central bank of Indonesia had room to ease monetary policy due to the nation's low inflation, a stable rupiah and an under-control current account deficit. Bank Indonesia implemented six rate cuts (including the change to the new benchmark BI 7-day RR Rate), effectively cutting the benchmark rate from 7.50 percent at the start of 2016 to 4.75 percent at the end of the year. The current low interest rate environment in Indonesia is expected to boost credit growth in 2017. This would partly be responsible for further acceleration of economic growth Southeast Asia's largest economy. Earlier this week the World Bank said it sees Indonesia's economy growing at a pace of 5.3 percent (y/y) in 2017, from an estimated 5.0 percent (y/y) in 2016.
Meanwhile, Bank Indonesia is optimistic about global economic growth. It expects the global economy to improve, supported by gains in the USA (where consumption and non-residential investment increased) and China (where retail sales and private investment grew). Regarding the crude oil price, Bank Indonesia expects to see an upward trend. Meanwhile export prices from Indonesia improved on the back of rising coal and various metal prices, including copper and lead.
Bank Indonesia's Benchmark Interest Rate:
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