Central Bank of Indonesia Keeps Key Interest Rate at 7.50% in March
The central bank of Indonesia (Bank Indonesia) decided to maintain its benchmark interest rate at 7.50 percent at today’s Board of Governors’ Meeting. The overnight deposit facility rate and lending facility rate were maintained at 5.50 percent and 8.00 percent, respectively. Bank Indonesia considers that the current interest rate environment is in line with its target to push inflation within its target range of 3.0-5.0 percent (y/y) in 2015 and to curb the country’s current account deficit to a range of 2.5-3.0 percent of gross domestic product (GDP).
Last month, Indonesia’s central bank made a surprise interest cut when it lowered its key interest rate (BI rate) by 25 basis points to 7.50 percent primarily on easing inflation. Indonesian inflation eased to 6.29 percent (y/y) in February from a peak of 8.36 percent (y/y) in December 2014. The rate cut last month was a surprise to many - if not all - analysts. This time, however, most analysts agreed that there would not be another rate cut as the Indonesian rupiah exchange rate has been one of the most vulnerable currencies to the shift in US monetary policy.
Indonesia's Key Interest Rate (BI Rate):
As a result the rupiah, which recently weakened to its lowest level since August 1998, appreciated 0.49 percent to IDR 13,181 per US dollar on Tuesday (17/03) according to the Bloomberg Dollar Index.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.21 percent to IDR 13,209 per US dollar on Tuesday (17/03).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Indonesia was one of the emerging markets that benefited significantly from US monetary easing that started in the late 2000s as the US quantitative easing program (in combination with low interest rates) led to capital inflows into Indonesia. Now, however, US monetary tightening causes the outflow of capital from emerging markets, and triggers bullish US dollar momentum.