Indonesia's central bank (Bank Indonesia) showed that it is committed to its relatively tight monetary stance as it left interest rates unchanged at its May Board of Governor’s Meeting. Despite pressures from the government and business players to cut interest rates (which would boost economic growth), Bank Indonesia maintained its key BI rate at 7.50 percent, the overnight deposit facility at 5.50 percent and the lending facility rate at 8.00 percent. In the first quarter of 2015 Indonesia’s economic growth had slowed to a disappointing 4.71 percent (y/y).
Bank Indonesia considers that the current interest rate environment is sufficient to push the country’s inflation back to the (revised) target range of 4.0 to 5.0 percent (y/y) in 2015 (Indonesian inflation had accelerated to 6.79 percent y/y in April) and will curb the country’s current account deficit to the range of 2.5 to 3.0 percent of GDP by the year-end.
However, the central bank is not deaf to pleas for increased liquidity. In an effort to boost economic growth, Bank Indonesia announced to loosen its macro-prudential policy by revising the LDR-RR regulation, LTV policy for mortgage loans and down payments on automotive loans.
Markets immediately reacted positively to the news. After having been down for most of the day against the US dollar, the rupiah quickly improved and had appreciated 0.31 percent to IDR 13,098 per US dollar by 16:00 pm local Jakarta time. Similarly, Indonesian stocks had been in red territory for most of the morning and early afternoon trading. However, after Bank Indonesia announced it maintained it plans to increase liquidity for banks’ credit expansion the benchmark Jakarta Composite Index had surged 0.63 percent to 5,270.80 by 16:00 pm local Jakarta time.
Meanwhile, Indonesia's March loan growth slowed to 11.3 percent (y/y) from 12.2 percent (y/y) in the previous month. Indonesia’s central bank targets loan growth of about 15 to 17 percent in 2015.