Bank Indonesia: Unscheduled Meeting Raises BI Interest Rate

November 18, 2014

At the regularly scheduled November policy meeting last Thursday, interest rates were left unchanged as expected.  But after the new governments reduced fuel subsidy was announced, which will boost such prices by 31%, an emergency meeting of monetary policymakers decided to raise the key reference BI interest rate to 7.75% from 7.5%, its level since a 25-basis point hike a year ago.  The lending rate has been raised 50 bps to 8.0%, while the deposit rate stays at 5.75, creating a wider spread between the two boundaries.  An accompanying statement is upbeat in tone.  The government’s decision to reconfigure spending more in favor of productive areas is welcomed, not criticized, and today’s action along with other monetary steps mentioned in the statement, are portrayed as a step toward tightening the coordination of monetary policy with other government policies.  The changes in interest rates are presented as a preemptive move to keep a temporary rise in inflation caused by higher fuel costs from rippling out into more general inflation and a rise in expected inflation.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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