Indonesia’s Fourth Central Bank Interest Rate Hike Since Mid-May

August 15, 2018

In the face of a wider current account deficit in Indonesia, intensifying global trade tensions, and Turkey’s crisis, which makes many emerging economies more vulnerable, Bank Indonesia’s key 7-day reverse repo rate was lifted by another 25 basis points to 5.50%. The deposit facility and lending facility rates also went up 25 basis points to 4.75% and 6.25%, respectively.

The central bank rates become 125 basis points higher than prior to mid-May. The first rate hike since 2014 was announced on May 17. That increase of 25 basis points was followed by hikes of 25 bps after an unscheduled central bank meeting on May 30 and a 50-basis point move on June 29th.

A released statement today notes, ” Global uncertainty has also been fueled by the risk of spillovers from the economic shocks in Turkey caused by domestic economic fragilities and the adverse impact of negative sentiment surrounding the authorities’ policies, as well as looming tensions with the US. Bank Indonesia will remain vigilant of the external risks, including potential spillover from Turkey although sound economic fundamentals in Indonesia are indicative of solid national economic resilience, coupled with avowed policy commitment.”

The rupiah has depreciated lately but not as sharply as some emerging market currencies. Indonesia runs a current account deficit, which has widened and amounts to about 2.5% of GDP. The deficit makes the country dependent on capital inflows to support the currency. CPI inflation is somewhat above 3.0%. If the rupiah falls, more upward inflationary pressure could result and amplify domestic price pressure from solid GDP growth. “Bank Indonesia projects economic growth in 2018 in the 5.0-5.4% (yoy) range, subsequently accelerating to 5.1-5.5% (yoy) in 2019.”

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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