Bank Indonesia’s First Interest Rate Cut since February 2012

February 17, 2015

Since Bank Indonesia’s Board had lifted the BI reference interest rate just three months ago, analysts were surprised by today’s reversal of that 25-basis point tightening.  The BI rate returns to 7.5% but remains 275 basis points higher than the 5.75% level after the last rate cut in February 2012.  A statement released today by the Board projects a sharp decline in CPI inflation, now hovering near 7% but expected to slide toward the lower end of the 3-5% target range.  A big change since November’s tightening has been plunging world oil prices.  However, the statement avoids language that might encourage markets not to assume that today’s move is the first in a series of easings.  Reducing inflation was not the only priority behind a series of rate hikes in 2013-14.  Indonesia’s current account deficit is running around 3% of GDP, high enough to make the rupiah an object of selling pressure when global conditions encourage capital to leave emerging economies in general. 

The overnight deposit rate was also cut at today’s meeting by 25 basis points, becoming 5.5%, but the overnight lending rate was left at 8.0%, thus increasing the rate corridor to 250 basis points.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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