The central bank of Indonesia (Bank Indonesia) is expected to leave its interest rate regime unchanged at Thursday’s Board of Governor’s meeting. Currently, Bank Indonesia’s key interest rate (BI rate) stands at 7.50 percent, the overnight deposit facility at 5.50 percent, and the lending facility rate at 8.00 percent. The central bank seems committed to this relatively high interest rate environment as the country’s inflation accelerated to 7.15 percent (y/y) in May, while the rupiah touched a 17-year low on 9 June 2015.
This year so far, Bank Indonesia revised its interest rate policy only once when, in February, it cut the BI rate by 25 basis points to 7.50 percent as inflationary pressure was easing. However, due to recovering global oil prices since the start of the year, transportation costs have risen in recent months. Meanwhile, the Ramadan (the holy fasting month for Muslims) will start on 17 June and this usually boosts consumer spending, followed by the Idul Fitri celebrations, hence causing additional inflationary pressures in the Indonesian economy.
Inflation in Indonesia:
|Month|| Monthly Growth
| Monthly Growth
| Monthly Growth
Source: Statistics Indonesia (BPS)
Inflation in Indonesia 2008-2014:
(annual percent change)
Source: World Bank
Apart from inflation, the weak rupiah is also a cause for concern. Ahead of looming higher US interest rates most currencies are depreciating against the US dollar. However, the rupiah has been particularly vulnerable as the Indonesian economy has been plagued by some disappointing macroeconomic data such slowing economic growth and the wide current account deficit. More generally, market participants are also disappointed to see slow government spending on infrastructure development.
Yesterday, Statistics Indonesia (BPS) announced that Indonesia posted a USD $3.75 billion trade surplus in the first five months of 2015. Although this is a positive development as it helps to curtail the country’s wide current account deficit, the trade data also show that export and particularly imports have declined drastically over the past year. This points to deteriorating global demand and slowing domestic economic activity.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) stayed at IDR 13,333 per US dollar on Tuesday (16/06).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia