Bank Indonesia Kept Key Interest Rate at 4.25% in October 2017
Bank Indonesia held its key rate at 4.25 percent at the October 2017 policy meeting. This decision was in line with expectations. In fact, previously, Bank Indonesia officials had already indicated that they would pause their eagerness to ease monetary policy. Since January 2016, the central bank of Indonesia had already cut the benchmark interest rate eight times from 7.25 percent to 4.25 percent in an effort to boost economic growth.
However, after two surprise interest rate cuts in August and September, the Indonesian rupiah started to depreciate. Although this rupiah weakness is in line with the performance of other emerging market currencies against the strengthening US dollar, Indonesian policy makers are now reluctant to push for more monetary easing. After all, the Federal Reserve is expected to hike its key interest rate once more before the end of 2017. This would encourage capital outflows from emerging markets, including Indonesia. The lower Bank Indonesia pushes down its key rate, the more capital outflows would follow.
Earlier, between January 2016 and September 2017, Bank Indonesia was able to push down its seven-day reverse repurchase rate from 7.25 percent to 4.25 percent because Indonesian inflation is low (for Indonesian standards) at 3.72 percent (y/y), the current account deficit is under control, while the rupiah exchange rate has been one of the most stable Asian currencies (against the greenback) over the past ten months (although pressures on the rupiah and other emerging market currencies started to rise in September 2017).
US dollar strength is primarily caused by rising expectations of a Fed Funds Rate hike in December 2017 as well as US tax reforms. Meanwhile, concerns over US-North Korea relations were also felt in markets. Data from Indonesia's Finance Ministry shows that between 22 September and 17 October, foreign holdings of Indonesian government bonds fell by around IDR 18 trillion (approx. USD $1.33 billion).
Meanwhile, Bank Indonesia said it expects Indonesia's gross domestic product (GDP) to expand in the range of 5.0 - 5.4 percent year-on-year (y/y) in 2017 on the back of improving consumption and retail sales as well as rising exports amid better commodity prices.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.02 percent to IDR 13,521 per US dollar on Thursday (19/10).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia