Bank Indonesia Keeps Policy Rate Unchanged

Indonesia' foreign exchange reserves stood at US$126.4 billion in August - Photo by Bank Indonesia.

JAKARTA (TheInsiderStories)Bank Indonesia decided to hold its benchmark seven-day reverse repo rate at 5.25 per cent on Thursday (19/07) to keep the Indonesian financial market attractive.

The deposit facility and lending facility rates are also unchanged, at 4.50 per cent and 6 per cent, respectively. This decision will be effectively implemented by July 19, 2018.

Macroprudential policy easing could increase bank flexibility and intermediation for economic growth. “This policy aimed to financial stabilization, especially rupiah [exchange rate], as well as to maintain bank liquidity and intermediation,” Bank Indonesia’s governor Perry Warjiyo said on Thursday (19/07).

Furthermore, Warjiyo stated Bank Indonesia will improve coordination with the government to boost tourism and infrastructure financing by private sectors. The central bank will keep a close watch on the domestic and global economic development.

“To strengthen the policy response that needs to be pursued,” he added.

Bank Indonesia raised its key interest rate third times this year with a total hike of 1 per cent on May 17, 2018; May 30, 2018; and June 29, 2018.

The decision was taken as an effort to stabilize the rupiah exchange rate amid the magnitude of global pressure, especially from the United States.

The U.S’s Federal Reserves (Fed) is likely to raise its benchmark rates at least two more times this year. The US central bank is also expected to increase the interest rate two or three times next year.

In addition, trade war between the US and China also put more risk and uncertainties in the global financial market.

Furthermore, rupiah is exposed to the domestic economic condition. Indonesia’s persistent current account deficit put more pressure on the rupiah exchange rate against the US dollar, which this year is exacerbated by a trade deficit. Indonesia recorded current account deficit of US$5.5 billion, or 2.15 per cent of GDP, in the first three months this year.

The country booked US$1.02 billion in the trade deficit from January to June 2018. Export in January to June 2018 reached US$88.02 billion or increase 10.03 per cent (year to year), lower than the import that reached US$89.04 million or increased 23.10 per cent (year to year).