Indonesia's central bank (Bank Indonesia) has sent a clear signal to those market participants that hope to see a lower benchmark interest rate (BI rate) in Southeast Asia's largest economy in the near future. Governor of Bank Indonesia Agus Martowardojo stated that there will be no lower BI rate as long as there is looming global uncertainty. On the contrary, the possibility of another BI rate hike is still there. In 2013, Bank Indonesia raised its BI rate on five occassions in order to combat inflation and curb the country's wide current account deficit.
Between June and November 2013, the BI rate was raised by a total of 175 basispoints from 5.75 percent to 7.50 percent. This constituted one of the most aggressive interest rate policy changes of Bank Indonesia in recent years but was less aggressive than policies of the central banks in Brazil or Turkey. In fact, the BI rate is still below the country's current inflation rate (8.22 percent in January 2014 year-on-year), resulting in a negative real interest rate for those that hold rupiahs. However, as inflation is expected to ease more markedly in the months ahead, this situation may change in the second quarter of 2014. Bank Indonesia still maintains its 2014 inflation target in the range of 3.5 percent to 5.5 percent (yoy).
The Chairman of Indonesia's Chamber of Commerce and Industry (Kadin) Suryo Bambang Sulisto said that, although the rupiah is appreciating recently, trade data have improved at the end of 2013, the current account deficit is under control, and foreign exchange reserves are growing, there remain many challenges. Sulisto is unsure whether this recent improving trend will continue until the end of 2014.
The current improving trend is mainly caused by external factors and Sulisto has not seen any real structural changes on the internal side. Particularly ahead of the implementation of the ASEAN Economic Community (AEC) in 2015, the lack of internal structural changes is worrying. The AEC will transform the ASEAN region into one region with free movement of goods, services, investment, and skilled labour, as well as a freer flow of capital.
Sulisto is concerned about how Indonesia can compete with its ASEAN colleagues when the country has a high interest rate environment, lack of infrastructure, higher electricity tarrifs and higher minimum wages. This all results in higher operating costs for the business community. Sulisto also stressed that the government needs to slash fuel subsidies again and relocate this spending to more productive and structural investments such as infrastructure. In June 2013 the government had raised prices of subsidized fuels (triggering public outrage and high inflation), but a significant amount of Indonesia's fuel prices remain subsidized today.