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Today's Headlines Monetary Policy
Before we give an update on the monetary policy of Indonesia’s central bank (Bank Indonesia), it is worth mentioning that Bank Indonesia Governor Perry Warjiyo was appointed for another five-year term (2023-2028) as the central bank’s chief.
On 06 March 2023, Indonesia Investments released its latest monthly report titled 'Normalizing Economic Growth'. As usual, we aim to present in-depth analyses of topics that are relevant in the context of economic, political and social developments in Indonesia.
The central bank of Indonesia (Bank Indonesia) raised its benchmark interest rate (BI 7-day reverse repo rate) by 25 basis points (bps) after concluding its two-day policy meeting on 18-19 January 2023. Indonesia’s benchmark rate now stands at 5.75 percent. It also raised its deposit facility and lending facility rates by 25 bps to 5.00 percent and 6.50 percent, respectively.
On 5 February 2023, Indonesia Investments released the January 2023 edition of its monthly report. This report discusses and analyses a number of important economic, social and political topics (all related to Indonesia) that were relevant in the month of January 2023.
As expected, the central bank of Indonesia (henceforth: Bank Indonesia) decided to raise its benchmark interest rate (the 7-Day Reverse Repo Rate) by 25 basis points (bps) to 5.50 percent after concluding its latest (two-day) monetary policy meeting on 21-22 December 2022. Meanwhile, it also decided to raise the deposit facility and lending facility rates by 25 bps to 4.75 percent and 6.25 percent, respectively.
On Wednesday (07.12.2022) Indonesia Investments released the November 2022 edition of its monthly report. In this report we zoom in on the most important economic, political, and social developments of Indonesia over the past month.
Last month we stated that Indonesia’s central bank (Bank Indonesia) might just be at the start of a (prolonged) monetary tightening cycle. After all, higher interest rates is what we see happening across the world; a development that is led by the Federal Reserve (Fed) that has been aggressively raising its benchmark interest rate to fight inflation. This then causes capital outflows from most other parts of the world.
As Indonesia’s central bank (Bank Indonesia) was very late in terms of tightening its monetary policy amid the latest global tightening cycle – and the US Federal Reserve continued its hawkish stance with another 0.75 percentage point hike in September 2022 – it has some catching up to do.
On 5 July 2022 Indonesia Investments released the June 2022 edition of its monthly report. In this report we analyze the latest (and most relevant) economic, political and social news from Indonesia.
On 6 June 2022 Indonesia Investments released its latest monthly report. As usual, our report offers independent, objective, and in-depth analyses of key economic, political and social topics that were in the news in Indonesia over the past month.
Latest Columns Monetary Policy
The central bank of Indonesia (Bank Indonesia) announced on Friday (15/04) it will adopt a new monetary tool per 19 August 2016 that is to replace the existing BI rate which is considered too inefficient to influence market liquidity as it is not directly tied to Indonesia's money markets. The seven-day reverse repurchase rate (reverse repo), which stood at 5.50 percent in the central bank's last auction, is to become the nation's new benchmark. Bank Indonesia Governor Agus Martowardojo, who communicated through a teleconference from Washington DC, emphasized that the central bank will not change its monetary stance.
Some concern has been raised about the inflow of foreign 'hot money' into Indonesia amid accomodative monetary policies conducted by central banks of the Eurozone and Japan (the latter implemented negative interest rates in late-January). The world's carry traders are now seeking cheap funds in advanced economies and invest these funds in assets that have attractive returns such as Indonesian bonds and stocks. Indonesia's benchmark interest rate (BI rate) is still relatively high at 7.0 percent after a 25 basis points cut at Bank Indonesia's February 2016 policy meeting.
As Indonesia's inflation rate has eased to 6.25 percent (y/y) in October 2015 from 6.83 percent (y/y) in the previous month, and given that Indonesian inflation will ease more markedly in the last two months of 2015 as the impact of the subsidized fuel price hike in November 2014 will vanish, the central bank of Indonesia (Bank Indonesia) seems to have more scope to cut its current relatively high benchmark interest rate, hence giving rise to accelerated economic activity.
Since late 2011 Indonesia has been plagued by a structural current account deficit (CAD) that has worried both policymakers and (foreign) investors. Despite Indonesian authorities having implemented policy reforms and economic adjustments in recent years, the country’s CAD remains little-changed in 2015. The World Bank and Bank Indonesia both expect the CAD to persist at slightly below 3 percent of the nation’s gross domestic product (GDP) in 2015, alarmingly close to the boundary that separates a sustainable from an unsustainable deficit.
Indonesia’s central bank (Bank Indonesia) decided to hold the country’s key interest rate (BI rate) at 7.50 percent, the deposit facility rate at 5.50 percent, and the lending facility rate at 8.00 percent at the Board of Governor’s Meeting conducted on Tuesday 17 March 2015. Bank Indonesia said that its decision is in line with its ongoing efforts to push inflation back to the target range of 4±1 percent for both 2015 and 2016, and to guide the country’s current account deficit towards a healthier level at 2.5-3 percent of GDP in the medium term.
Indonesia’s consumer price index fell for the second consecutive month in February 2015, recording deflation of 0.36 percent month-on-month (m/m) in February, while on an annual basis Indonesian inflation eased to 6.29 percent (y/y), down from 6.96 percent (y/y) in the preceding month. Inflationary pressures declined primarily on the back of lower prices of chili peppers and fuel. Easing inflation in Southeast Asia’s largest economy may provide room for Indonesia’s central bank (Bank Indonesia) to cut interest rates further this year.
A team of the International Monetary Fund (IMF), led by David Cowen (advisor at the IMF’s Asia and Pacific Department), visited several Indonesian cities in the first three weeks of December 2014 to conduct research on the economic fundamentals of Southeast Asia’s largest economy. This research included the study of recent macroeconomic developments as well as the formulation of prognosis scenarios for the short and middle term. The IMF team held discussions with the government, Bank Indonesia, private entrepreneurs and scholars.
International credit rating agency Fitch Ratings maintained Indonesia’s sovereign rating at BBB-/stable outlook (investment grade). Baradita Katoppo, President Director of Indonesia’s Fitch Ratings branch, said that the firm is positive about the country’s financial fundamentals and prudent fiscal policy as the central bank has showed to prefer stability over growth, resulting in slowing credit growth and rising foreign exchange reserves in Southeast Asia’s largest economy. Economic growth is expected to fall to 5.1 percent (y/y) in 2014.
Indonesia’s fuel subsidy policy is estimated to have a large influence on investors’ confidence in the financial or fiscal fundamentals of Southeast Asia’s largest economy and thus on the performance of the local stock index and currency. New president elect Joko Widodo (popularly known as Jokowi) is expected to raise prices of subsidized fuels after taking office in late October 2014 in an attempt to combat the country’s wide current account deficit (mainly caused by expensive oil imports to meet domestic fuel demand).
At Bank Indonesia's Board of Governors’ Meeting today (13/02), it was decided to maintain the country's benchmark interest rate (BI rate) at 7.50 percent as well as the interest rates on the Lending Facility and Deposit Facility at 7.50 percent and 5.75 percent respectively. The policy is consistent with the tight monetary policy stance currently adopted in order to steer inflation back towards its target corridor of 4.5±1 percent in 2014 and 4±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level.
