For the sixth straight month, the central bank of Indonesia (Bank Indonesia) left its interest rate regime unchanged at Tuesday’s Board of Governor’s meeting (18/08) as it aims to guard the rupiah against severe volatility (which occurred after China’s yuan was allowed to devalue, while markets are still preparing for monetary tightening in the USA) and tries to combat inflation.
The BI rate was kept at 7.50 percent, while the overnight deposit rate (Fasbi) and lending facility rate were maintained at 5.50 percent and 8.00 percent, respectively.
Bank Indonesia Governor Agus Martowardojo said the rupiah is currently undervalued - after having depreciated to a 17-year low against the US dollar - due to severe external pressures. Last week, Chinese policymakers allowed the yuan to depreciate against the US dollar, presumably in a bid to boost the country’s export performance (hence boost sluggish economic growth in the world’s second-largest economy). For other emerging Asian economies, including Indonesia, it is important to keep their export products competitive and therefore it is not likely that Bank Indonesia will use large quantities of its foreign exchange reserves in order to support the rupiah.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.49 percent to IDR 13,831 per US dollar on Tuesday (18/08).
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank Indonesia
Moreover, the currency of Indonesia is still plagued by pressures brought about by looming further monetary tightening in the USA (higher US interest rates). In its statement published on Tuesday (18/08) Bank Indonesia wrote: “ despite the optimistic outlook relayed at the FOMC in July 2015, the US economy is not expected to attain earlier projections for 2015 due to relatively sluggish Q1 and Q2 actuals combined with weak non-residential investment.” This implies that markets are plagued by prolonged uncertainty about the timing of higher US interest rates.
Another reason why the central bank has little (or no) room to ease its monetary policy approach is high inflation. According to the latest data of Statistics Indonesia (BPS), Indonesian inflation stood at 7.26 percent (y/y) in July 2015 as transportation and food prices have increased in recent months. As such, inflation is still far from Bank Indonesia’s target range 4.0 - 5.0 percent in 2015.
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