Most analysts agree that the central bank of Indonesia (Bank Indonesia) will leave its interest rate regime unchanged at the Board of Governors’ Meeting that is scheduled for Tuesday 14 July 2015. Indonesia’s central bank is expected to maintain its key interest rate (BI rate) at 7.50 percent, the overnight deposit facility rate (Fasbi) at 5.50 percent, and the lending facility rate at 8.00 percent as the country’s inflation rate has recently accelerated while the rupiah has been under pressure due to external factors.
Between June and November 2013 Bank Indonesia gradually, yet aggressively, raised its BI rate from 5.75 percent to 7.50 percent primarily due to rising inflation (after a subsidized fuel price hike in June 2013) and external pressure brought about by monetary tightening in the USA. At the end of 2014, Bank Indonesia again hiked its BI rate (by 25 basis points) to 7.75 percent before - in a surprise move - lowering the key policy rate to 7.50 percent in February 2015 as inflation seemed under control. Moreover, many business players as well as the government requested monetary easing as higher borrowing costs have been one of the key factors that have caused slower economic growth.
However, inflation has again accelerated due to recovering petroleum prices in the first half of 2015. Currently Indonesia is also feeling the usual price pressures due to the Ramadan and Idul Fitri celebrations. According to the latest data from Statistics Indonesia (BPS), Indonesia inflation accelerated to 7.26 percent (y/y) in June 2015. Bank Indonesia targets an inflation pace of between 3 and 5 percent (y/y). It is still possible to achieve the target as the impact of last year’s subsidized fuel price hike (in November) will vaporize toward the year-end. In November and December 2014, inflation peaked at 1.50 percent (m/m) and 2.46 percent (m/m), respectively.
Another concern is the Indonesian rupiah. Ever since the US Federal Reserve has started to focus on monetary tightening the rupiah has been depreciating (against the US dollar). Between 31 May 2013 and 13 July 2015, the rupiah depreciated 35.8 percent against the US dollar due to bullish dollar momentum. Another BI rate cut would place more depreciating pressure on the rupiah, which is currently near 17-year low levels.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Another sign that Bank Indonesia is unwilling to cut its interest rate regime anytime soon is recently revised down payment requirements. In June 2015, the central bank lowered the amount of down payments required for the purchase (using credit from a financial institution) of cars, motorcycles and property in an effort to boost credit growth and economic expansion.