As expected Indonesia's central bank (Bank Indonesia) refrained from adjusting its interest rate regime at Tuesday’s Board of Governor’s meeting (14/07). The key BI rate was kept at 7.50 percent, while the overnight deposit rate (Fasbi) and lending facility rate were left at 5.50 percent and 8.00 percent, respectively. Bank Indonesia believes that the current interest rate environment is in line with its efforts to bring down inflation while supporting Indonesia’s ailing rupiah ahead of expected further monetary tightening in the USA later this year.
Indonesian inflation accelerated to 7.26 percent (y/y) in June 2015 on the back of higher food prices (due to the Ramadan month) and this year’s recovering global petroleum prices. The central bank aims to have pushed inflation back to its target range of 3 to 5 percent (y/y) by the year-end.
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
Meanwhile, the rupiah - in line with most other currencies - has been plagued by bullish US dollar momentum since May 2013 due to monetary tightening in the USA. Last week, Federal Reserve Chairwoman Janet Yellen said that she expects US interest rates to be hiked later this year, implying more depreciating pressures on global currencies, particularly emerging market currencies such as the rupiah. So far this year, the Indonesian rupiah has been the second-worst performer in emerging Asia (after Malaysia’s ringgit). The rupiah has weakened 7.1 percent against the US dollar between 1 January and 14 July 2015.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Bank Indonesia’s commitment to the tighter monetary stance shows that the institution prefers macroeconomic stability over accelerated economic growth. Various business players as well as the government requested the central bank to cut its key policy rate in order to make room for accelerated economic growth (which has slowed to a six-year low of 4.71 percent y/y in the first quarter of 2015). Instead of cutting the BI rate (which would place further pressures on the Indonesian rupiah), Bank Indonesia decided to ease down payment requirements for car, motorcycle and property purchases in an effort to boost credit growth and economic expansion.
Bank Indonesia's Benchmark Policy Rate (BI Rate):
Bank Indonesia also announced that loan growth in May 2015 stood at 10.4 percent (y/y), relatively unchanged from the previous month. The central bank targets loan growth in the range of 11-13 percent (y/y) in 2015. It expects credit growth to accelerate in the second half of the year on the back of escalating economic activity and the central bank’s looser macro prudential policy.