Bank Indonesia Leaves Interest Rates Unchanged to Support Rupiah, Combat Inflation
In line with expectation, the central bank of Indonesia (Bank Indonesia) decided to keep its key interest rate (BI rate) at 7.50 percent for a seven consecutive month in September’s Board of Governor’s meeting (17/09) as it aims to stabilize the rupiah amid global volatility caused by looming higher US interest rates and China’s hard landing (as well as yuan depreciation), while combating inflation which stood at 7.18 percent (y/y) in August. The overnight deposit facility rate and lending facility rate were left unchanged at 5.5 percent and 8 percent, respectively.
Bank Indonesia’s announcement came ahead of results from a crucial Federal Reserve meeting (16-17 September). Although chances are small that the Federal Reserve will decide to raise its key Fed Fund Rate during this meeting, it is not completely inconceivable. This is a major difference from previous months. A Fed Fund Rate hike would imply temporary capital outflows from emerging markets, including Indonesia.
Benchmark Interest Rate Indonesia (BI Rate):
In anticipation of the looming US interest rate hike the Indonesian rupiah has already depreciated 16.2 percent so far in 2015, touching a 17-year low, while Indonesia’s benchmark 10-year government bond yield edged down slightly to 9.444 percent (from 9.520 percent earlier) after Bank Indonesia announced to leave interest rates unchanged. In recent months, the Indonesian central bank has been intervening in foreign exchange and bond markets to support the ailing rupiah (leading to the country’s declining foreign exchange reserves).
Bank Indonesia has limited room to raise or cut its interest rate regime as a rate cut would put pressure on the rupiah, while a rate hike would put more downward pressure on Indonesia’s economic growth (which has already slowed to a six-year low of 4.67 percent y/y in Q2-2015).
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) hit a fresh 17-year low on Thursday (17/09) as it depreciated 0.07 percent to IDR 14,452 per US dollar.
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank Indonesia
Inflation in Indonesia:
| Month | Monthly Growth 2013 |
Monthly Growth 2014 |
Monthly Growth 2015 |
| January | 1.03% | 1.07% | -0.24% |
| February | 0.75% | 0.26% | -0.36% |
| March | 0.63% | 0.08% | 0.17% |
| April | -0.10% | -0.02% | 0.36% |
| May | -0.03% | 0.16% | 0.50% |
| June | 1.03% | 0.43% | 0.54% |
| July | 3.29% | 0.93% | 0.93% |
| August | 1.12% | 0.47% | 0.39% |
| September | -0.35% | 0.27% | |
| October | 0.09% | 0.47% | |
| November | 0.12% | 1.50% | |
| December | 0.55% | 2.46% | |
| Total | 8.38% | 8.36% | 2.29% |
Source: Statistics Indonesia (BPS)
Inflation in Indonesia 2008-2014:
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |
| Inflation (annual percent change) |
9.8 | 4.8 | 5.1 | 5.4 | 4.3 | 8.4 | 8.4 |
Source: World Bank
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