The central bank of Indonesia (Bank Indonesia) kept its key interest rate (BI rate) at 6.75 percent at the April policy meeting. This decision was in line with expectations. During the three policy meetings conducted in the January-March 2016 period Bank Indonesia had already cut its BI rate by a combined 75 basis points as inflation and the current account deficit are under control, while the Indonesian rupiah has been strengthening against the US dollar since the start of 2016. Last week, Bank Indonesia announced it will adopt the seven-day reverse repurchase rate (reverse repo) to replace the existing BI rate as the bank's key monetary tool.
Up to 19 August 2016 - when the seven-day repo rate becomes the central bank's key rate - the existing BI rate will be maintained as Bank Indonesia's benchmark policy rate. At the April policy meeting Bank Indonesia also decided to keep its deposit facility rate and lending facility rate at 4.75 percent and 7.25 percent, respectively. Meanwhile, the seven-day repo rate remained at 5.50 percent.
Indonesia's central bank is eager to replace the BI rate by the seven-day repo rate because the latter is regarded a better monetary tool to influence market liquidity. For example, despite having cut the BI rate by a combined 75 basis points in the first three policy meetings of the year, Indonesia's lending rates only fell slightly. The seven-day repo rate, on the other hand, is believed to be more closely tied to the money market (and constitutes a transactional tool). The repo rate is the rate at which Bank Indonesia borrows money from local commercial banks.
Inflation rose slightly to 4.45 percent (y/y) in April 2016. Regarding full-year 2016 the central bank set its inflation target at the range of 3 - 5 percent (y/y).
In 2015 the current account deficit of Indonesia reached USD $17.8 billion (or 2.06 percent of Indonesia gross domestic product, abbreviated GDP), improving from a USD $27.5 billion deficit (3.09 percent of GDP) in the preceding year. The current account deficit is expected to climb to USD $26 billion, or 2.6 percent of GDP, in 2016. Generally, a deficit below 3 percent of GDP is regarded sustainable although it does mean that the country continues to accumulate net foreign liabilities which may pose risks over time.
Meanwhile, the Indonesian rupiah has appreciated 4.4 percent to IDR 13,182 per US dollar since the start of 2016.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia