The central bank of Indonesia (Bank Indonesia) decided to maintain its key interest rate (BI rate) at 7.50 percent at Tuesday’s Board of Governors’ Meeting (14 April 2015). The institution also left its deposit facility and lending facility at 5.50 percent and 8.00 percent, respectively. Bank Indonesia considers this level to be effective in order to push the country’s inflation rate back into its target range of 3-5 percent (y/y) in both 2015 and 2016. It is also convinced that this interest rate environment will improve the current account balance.
Bank Indonesia targets to curb the country’s current account deficit to the range of 2.5-3.0 percent of gross domestic product (GDP). This deficit has been a problem for Indonesia as it signals that the country is dependent on foreign inflows. Inflation has shown an easing trend since the start of the year, although in March is increased slightly to 6.38 percent year-on-year (from 6.29 percent) due to administered price adjustments; prices of premium and Pertamax petrol, diesel, and 12 kg canisters of LPG increased amid higher international petroleum prices as well as rupiah depreciation.
The central bank’s decision to leave interest rates unchanged was widely expected by markets as Bank Indonesia needs to support the Indonesian rupiah and avert capital outflows ahead of further monetary tightening in the USA, necessary to maintain macroeconomic and financial stability. As foreign investors hold nearly 40 percent of Indonesian government local currency bonds, the country is particularly vulnerable to capital outflows in times of global turmoil.
Key Interest Rate Bank Indonesia (BI Rate):
Based on data from Bank Indonesia, the rupiah depreciated by an average of 2.37 percent (month to month) to IDR 13.066 per US dollar in March 2015. After Bank Indonesia announced that it decided not to alter interest rates, the rupiah tended to appreciate slightly against the US dollar on today’s trading day. However, if looming higher interest rates in the USA will lead to severe pressures on the rupiah, then Bank Indonesia is expected to raise its interest rate environment.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Although Bank Indonesia introduced a surprise 25-basis points interest rate cut in February 2015 (to 7.50 percent), the Indonesian interest rate environment is still relatively high. This is partly the reason why Indonesia’s economic growth has eased to 5.02 percent (y/y) in 2014, a five-year low. Bank Indonesia estimates that the Indonesian economy will expand by about 5.5 percent (y/y) in 2015. However, if the government can speed up infrastructure projects realization, if domestic consumption remains strong, and if exports improve gradually, then economic growth may accelerate to 5.8 percent (y/y) this year.