Bank Indonesia Makes an Unscheduled Tightening of Policy

August 29, 2013

Two weeks after a scheduled meeting that left the key BI policy rate at 6.5%, the Board of Governors convened for an unscheduled meeting, after which a package of measures including a BI rate hike to 7.0%, a 50-basis point deposit rate hike to 5.25%, and a 25-bp lending rate increase to 7.0% was revealed.

Overall, the Board of Governors concurred that the national economic adjustment process to the global economic downturn is showing indications of progress, which is inextricably linked to the ongoing monetary and macro prudential policy mix pursued by Bank Indonesia as well as coordinated policy measures taken in conjunction with the Government and through fora such as Financial System Stability Coordination Forum (FKSSK). Nonetheless, the Board of Governors agreed that global economic pressures and uncertainty will persist looming ahead due to the timeframe and magnitude of monetary stimulus tapering by the Fed, lower commodity prices and weaker global economic growth.

BI decided to introduce supplementary measures to reinforce the monetary and macro prudential policy mix to curb inflation, stabilize rupiah exchange rates, ease the current account deficit as well as strengthen macroeconomic resilience and financial system stability.

Today’s statement from which the above excepts were extracted projects a current account deficit last quarter equal to 4.4% of GDP, end-2013 CPI inflation of between 9.0% and 9.8%, and economic growth near the lower bound of a 5.8-6.2% targeted range.  The rupiah is trading about 12% below its end-2012 level.  Indonesia’s mix of problems is shared by several other emerging markets that previously attracted lots of yield-seeking capital that is now reversing direction ahead of the Fed’s planned wind-down of quantitative easing.  The Central Bank of Brazil also tightened policy today.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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