Bank Indonesia Should Keep BI Rate at 7.50% due to Fragile Rupiah
On Wednesday (13/01) Indonesia's central bank is set to start its monthly policy meeting. A novelty this year is that the monthly policy meetings of Bank Indonesia will take two days instead of one. Another interesting novelty is that Bank Indonesia invited Indonesia's Chief Economics Minister Darmin Nasution to attend the central bank's first policy meeting of 2016. Analyst opinions about whether Bank Indonesia has room to cut its relatively tight monetary policy are mixed.
Indonesia's benchmark interest rate (known as the BI rate) is still relatively high at 7.50 percent as Bank Indonesia prefers financial stability over accelerated economic growth. Although the Federal Reserve finally provided clarity to markets by raising its key Fed Fund Rate in December 2015 and Indonesia's inflation slowed to 3.4 percent (y/y) in the same month, global markets are now increasingly concerned and rocked by economic turmoil in China, giving rise to severe volatility on financial markets worldwide as well as risk aversion (implying capital outflows from emerging markets including Indonesia).
China's weakening economy and possible further yuan devaluation (an attempt to boost the country's export performance) puts pressure on Indonesia's rupiah (as well as on other emerging market currencies in Asia). Given that Indonesia's inflation is under control while the country's current account deficit narrowed to USD $17.5 billion in 2015 (from a deficit of USD $27 billion one year earlier), the main cause of concern for Bank Indonesia is now rupiah stability. Today (12/01), the Indonesian rupiah depreciated 0.34 percent to IDR 13,910 per US dollar (Bloomberg Dollar Index).
Bank Indonesia's BI Rate:
The fragile rupiah is reason why we do not expect to see an interest rate cut yet in Indonesia. A 25 basis points cut would be better at a time when there is concrete evidence that Indonesia's economy starts to accelerate (after having slowed - last year - to its slowest growth pace since 2009) and equity inflows are stronger. A stable rupiah is key to support estimated accelerated economic growth (estimated at 5.3 percent in 2016) and also important to safeguard inflows that can finance the country's current account deficit. Bank Indonesia has kept its BI rate at 7.50 percent since February 2015.
It is unknown why Bank Indonesia invited Economics Minister Darmin Nasution (who served as Bank Indonesia Governor in the years 2010-2013) to attend the central bank's two-day policy meeting that starts on Wednesday. According to a Bank Indonesia law, issued in 1999, a government representative is allowed to join the meeting (but has no voting rights).
Bank Indonesia's January 2016 Board of Governor's Meeting:
| Topics on the Agenda | |
| Day 1 Wednesday 13 January 2016 |
Discuss assessment results from the monetary sector, financial system stability, payment systems as well as rupiah management |
| Day 2 Thursday 14 January 2016 |
Setting a monetary policy mix and announce the BI rate |
Source: Bank Indonesia