In line with expectations the central bank of Indonesia (Bank Indonesia) kept its benchmark interest rate (the 7-day Reverse Repo Rate) at 5.25 percent at the two-day July policy meeting (concluded on Thursday 19 July 2018). Meanwhile, the deposit facility and lending facility rates were kept at 4.50 percent and 6.00 percent, respectively.
It means Bank Indonesia decided to pause the aggressive monetary tightening that we saw over the past two months. Between mid-May and late-June the central bank had raised the country's benchmark interest rate from 4.25 percent in mid-May to 5.25 percent in late-June in an effort to defend the fragile rupiah rate.
Since February 2018 the Indonesian rupiah has been plagued by a mix of external and internal issues including looming further monetary tightening in the USA, concerns over simmering global trade tensions (led by USA-China trade relations), higher US Treasury notes, and Indonesia's widening current account deficit.
Although the rupiah is currently still at a weak level - at IDR 14,442 per US dollar by 15:00 pm local Jakarta time on Thursday (19/07) based on the Bloomberg Dollar Index - external pressures have diminished over the past couple of weeks and therefore the rupiah has been relatively stable against the US dollar since the last Bank Indonesia rate hike in late-June. In fact, investors have pumped more than USD $475 million into government bonds this month following weeks of outflows.
The rupiah rate remained stable after the announcement. However, Indonesia's benchmark Jakarta Composite Index slid after the news became public.
A more detailed analysis of Indonesia's monetary policy will be available in the July edition of Indonesia Investments' research report (available per early August).