Bank Indonesia Leaves Key Interest Rate Unchanged Despite Some Pressure on the Rupiah
At the latest monthly monetary policy meeting (held on 21-22 June 2023) the central bank of Indonesia (Bank Indonesia) decided to keep its benchmark interest rate (the Seven-Day Reverse Repo Rate) at 5.75 percent. The lender of last resort also kept its deposit facility and lending facility rates at 5.0 percent and 6.5 percent, respectively.
In a statement Bank Indonesia said this policy decision is consistent with its stance to control core inflation within its 2.0–4.0 percent year-on-year (y/y) target in 2023, while at the same time strengthening the stability of the rupiah rate to curb imported inflation and mitigate the contagion effect of global financial market uncertainty.
There are three key matters that Bank Indonesia needs to keep a close eye on when formulating monetary policy:
(1) Policy decisions taken by the US Federal Reserve;
(2) The performance of the Indonesian rupiah; and
(3) The level of inflation in Indonesia.
Because inflation is discussed in detail in another article in this report, we focus on US monetary policy and the Indonesian rupiah rate in this article.
Federal Reserve
In mid-June 2023, the US Federal Reserve (Fed) took a pause after ten consecutive interest rate increases. It was a decision that was in line with market expectations.
However, contrary to expectations around two months ago, this is not the end of the tightening cycle. In fact, signals have become very clear that the Fed will impose two more quarter percentage point rate increases before the end of 2023 as it continues to combat high inflation (there are four more Fed meetings scheduled for 2023).
The Fed’s preferred personal consumption expenditures (PCE) price index did ease to 3.8 percent (y/y) in May 2023 but excluding food and energy the annual increase in prices was greater at 4.6 percent. This is still a long way from the Fed’s targeted 2 percent (y/y).
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This is the introduction of the article. The full article is available in our June 2023 report. This report (an electronic report) can be ordered by sending an email to [email protected] or a message to +62.882.9875.1125 (including WhatsApp).
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