Indonesia’s Central Bank Holds Benchmark Interest Rate at 7.75%, Paving the Way for Monetary Policy Easing in the Second Half of the Year
According to a January 16 report by the Jakarta Post, following the recent meeting of the Board of Governors of Bank Indonesia, Central Bank Spokesperson Serryka stated that, in order to better address external challenges posed by the Federal Reserve’s interest-rate hikes and the sluggish global economic recovery, Bank Indonesia has decided to maintain its benchmark interest rate at 7.75%, its lending rate at 8%, and its deposit rate at 5.75%.
Earlier, Indonesian President Joko Widodo announced that the price of gasoline would be reduced from the previous level of 7,600 rupiah per liter to between 6,400 and 6,500 rupiah (approximately 52 to 53 U.S. cents), which is expected to lower the inflation rate by 0.24 percentage points. This year, inflationary pressures in Indonesia have been relatively mild, and the current interest-rate level is sufficient to keep the annual inflation rate at 4% while ensuring the economy continues to develop normally.
Indonesia’s current macroeconomic indicators are relatively healthy, and the Federal Reserve’s interest-rate hikes are unlikely to trigger significant volatility in the country’s capital markets; however, Bank Indonesia will continue to prioritize macroeconomic stability. The continued implementation of a tight monetary policy and macroprudential measures, coupled with the easing of inflationary pressures resulting from the decline in international oil prices, will create room for a more accommodative monetary policy in the second half of this year.
In addition, a rapid reduction in the benchmark interest rate could have a negative impact on the rupiah exchange rate; last year the rupiah depreciated by 1.7% against the U.S. dollar, and so far this year the depreciation has already reached 1.4%.
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