Bank Indonesia Keeps Key Interest Rate at 4.25% in December 2017
Bank Indonesia, the central bank of Indonesia, left its benchmark interest unchanged at the final (regular) policy meeting of 2017. The BI 7-day Reverse Repo Rate was kept at 4.25 percent on Thursday (14/12). Meanwhile, the deposit facility and lending facility were kept at 3.50 percent and 5.00 percent, respectively (effective per 15 December 2017).
The central bank's decision was in line with our forecast. Last week, a Bank Indonesia official had stated that the institution would focus on inflation and the rupiah rate to determine the direction of its benchmark interest rate. Considering inflation is low at 3.3 percent year-on-year (y/y), while the rupiah has been stable recently, it was assumed Bank Indonesia would carefully monitor the impact of the Federal Reserve's latest interest rate hike overnight (13/12).
Indonesia's rupiah actually appreciated 0.11 percent to IDR 13,576 per US dollar (Bloomberg Dollar Index) after the US Federal Reserve (as expected) raised its key interest rate to the range of 1.25 - 1.50 percent on Wednesday. The Fed expects faster growth and lower unemployment in 2018 as the US economy strengthens. The Fed's move was priced in already in markets and therefore had few impact on Indonesian assets. The benchmark Jakarta Composite Index in fact surged nearly 1 percent on Thursday.
Over the past two years Bank Indonesia has aggressively cut its BI 7-day Reverse Repo Rate. However, there seems limited room for further monetary easing in Southeast Asia's largest economy in (the first half of) 2018 due to looming further Fed rate hikes and the normalization of its balance sheet.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.18 percent to IDR 13,565 per US dollar on Thursday (14/12).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
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