As expected, the central bank of Indonesia (Bank Indonesia) left its benchmark interest rate (BI rate) unchanged at 7.50 percent at the October Board of Governor's meeting on Thursday (15/10). Meanwhile, Bank Indonesia maintained the deposit facility rate and the lending facility rate at 5.50 percent and 8.00 percent, respectively. Rates were left unchanged as the global economic outlook remains highly uncertain. This jeopardizes the stability of the Indonesian rupiah.
In a statement Bank Indonesia said it is convinced that inflation will ease to the lower half of the 3-5 percent (y/y) corridor, while the current account deficit may improve to 2 percent of gross domestic product (GDP) by the year-end.
The central bank also stated it believes that pressures on Indonesia's macroeconomic stability has eased, opening room for a looser monetary policy. However, due to the high degree of uncertainty in the global market, Bank Indonesia remains vigilant despite more conducive conditions on global financial markets. As such, the central bank's policy will continue to focus (in the near term) on currency stabilization measures, strengthening rupiah liquidity management as well as the supply and demand of foreign exchange.
Regarding Indonesia's economic growth in Q3-2015, Bank Indonesia expects to see a slight improvement from the 4.67 percent (y/y) GDP growth pace in Q2-2015. Slightly accelerated GDP growth is due to greater capital spending by the government despite relatively sluggish private sector activity. Stronger sales of cement and heavy equipment provide further evidence that investment activity is increasing. Private investment is expected to buck its downward trend due to the recent policy packages introduced by the government, including deregulation to buoy the investment climate. On the other hand, consumption indicators, such as retail sales and consumer confidence, were down but have begun to show signs of improvement. The central bank estimates an economic growth pace in the range of 4.7-5.1 percent in 2015. Government consistency in terms of pushing structural reforms through various policy packages and the realization of infrastructure projects are expected to boost the economy.