Forecast: Bank Indonesia Expected to Keep Key Interest Rate at 7.5%
The central bank of Indonesia is expected to keep its key interest rate (BI rate) at 7.50 percent at the next Board of Governors’ meeting (scheduled for Thursday 13 November 2014) in anticipation of accelerated inflation triggered by higher prices of subsidized fuels. The Indonesian government plans to raise prices of subsidized gasoline and diesel before the end of the month in an attempt to curb the country’s wide current account deficit and reallocate government funds to more structural or productive activities than fuel consumption.
If the central bank (Bank Indonesia) will indeed hold the BI rate at 7.50 percent, then it would be the 12th consecutive month that the institution kept its key rate at this position. Through 2013, Bank Indonesia gradually raised its BI rate from 5.75 percent to 7.50 percent in an effort to combat high inflation (after a subsidized fuel price hike in June 2013) as well as to curb the wide current account deficit (to support the rupiah exchange rate), and to limit capital outflows amid the looming ending of the US Federal Reserve’s quantitative easing program.
Bank Indonesia Rate (BI Rate) 2010-2014:
As US interest rates are expected to rise in the second quarter of 2015, there are considerable chances that Indonesia’s central bank will raise its BI rate further. This move would make it harder to reverse the recent trend of slowing economic growth in Southeast Asia’s largest economy as local purchasing power and demand decline. In the third quarter of 2014, Indonesia’s household consumption was still strong (evidenced by a 5.4 percentage point growth y/y). However, it accounted for 55.11 percent of the country’s gross domestic product (GDP) in Q3-2014, thus slightly down from 55.72 percent of GDP in the previous quarter.
In October 2014, inflation was higher than projected, primarily on higher liquefied petroleum gas (LPG) and electricity tariffs as well as volatile food prices. On a year-on-year basis, the consumer price index of Indonesia accelerated to 4.83 percent. Core inflation - which excludes volatile food and fuel prices - increased 4.02 percent.
Inflation in Indonesia:
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Source: Statistics Indonesia (BPS)