Bank Indonesia boards announcing BI 7 Days Reverse Repo Rate (Photo: Bank Indonesia)

JAKARTA (TheInsiderStories) – Bank Indonesia (BI) kept its benchmark interest rate — 7-Days Reverse Repo rate – unchanged at 4.25 per cent on Thursday, consistent with efforts to maintain macroeconomic stability and financial system and contribute to the recovery of the domestic economy.

BI Governor Agus Martowardojo said that the easing of monetary policy has been sufficient to continue to boost the domestic economic recovery momentum. In macro prudential policy, the bank will keep its stance to loosen the regulation to support domestic credit growth to stimulate economic growth.

Later this year, however, Bank Indonesia is expected to raise its key interest rate due to looming rising pressures. The central bank is not expected to adjust its monetary policy in response to a Fed Funds Rate hike in March 2018.

However, another Fed Funds Rate hike in June 2018 could give rise to more pressures and capital outflows from emerging markets, including Indonesia. The Federal Reserve could raise its key rate three times in 2018 (March, June, and December).

(Source: Bank Indonesia)

Global economic growth in 2018 is expected to increase and followed by rising world commodity prices. The increase in global economic growth stems from improved economies of developed and developing countries that are stronger than originally forecast.

The Indonesian economy continues to show improved performance with a more balanced structure. Realized quarterly GDP growth of Q3 / 2017 rose by 5.19 per cet (yoy) compared to 5.06 per cent (yoy) in the preceding quarter, indicating the ongoing recovery of the domestic economy. 

The improvement in economic growth is also supported by a stronger structure with investment and exports as the main source of growth. Investments grew quite high by 7.27 per cent (yoy) driven by an increase in building investment in line with continued infrastructure development and rising non-construction investment in anticipation of an upswing in demand.

Meanwhile, exports grew quite high 8.5 per cent (yoy) affected by the positive impact of world economic recovery and commodity price increase. In addition, the economic growth is also driven by the acceleration of government spending amid relatively stable household consumption supported by controlled inflation.

The currency rate moved higher in January 2018 after hit by global pressure in the fourth quarter of 2017. In February, the increasing uncertainty of global financial markets particularly related to expectations of higher than expected Fed Fund Rate increases put pressure on global currencies, including the Rupiah.

Looking ahead, BI predicts that economic growth in 2018 will be in the range of 5.1-5.5 per cent. 

The economic growth will be supported by investments as infrastructure projects continue and increased non-construction investment including private investment, especially machinery and equipment.