Markets Feel Impact of Bank Indonesia’s Interest Rate Cut
One day after the surprise interest rate cut by Indonesia’s central bank, Indonesian stocks surge to a new record level led by interest rate sensitive stocks (such as financial institutions, construction firms and property firms) while the rupiah and government bonds are weakening. Yesterday (17/02), Bank Indonesia shocked markets by lowering its key interest rate (BI rate) and deposit facility rate (Fasbi) by 25 basis points, each, to 7.50 percent and 5.50 percent, respectively. Easing monetary policy is back in fashion among the region’s central banks.
Indonesia's Benchmark Interest Rate (BI Rate):
Indonesia’s central bank decided to ease the country’s relatively tight monetary policy as inflation is under control. At the end of 2014 inflation in Southeast Asia’s largest economy accelerated markedly due to the government’s decision to raise prices of subsidized fuels. However, amid low global oil prices, this fuel policy could be reformed by the Indonesian government in January (basically scrapping fuel subsidies for low-octane gasoline altogether while introducing a fixed IDR 1,000 per liter subsidy for diesel) implying that fuel prices tumbled and thus paving the way for deflation (-0.24 percent month-to-month) in the first month of 2015. On a year-on-year basis inflation eased from 8.36 percent in December 2014 to 6.96 percent in January 2015.
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% | |
| March | 0.63% | 0.08% | |
| April | -0.10% | -0.02% | |
| May | -0.03% | 0.16% | |
| June | 1.03% | 0.43% | |
| July | 3.29% | 0.93% | |
| August | 1.12% | 0.47% | |
| 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% | -0.24% |
Source: Statistics Indonesia (BPS)
Inflation of 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 |
Sources: World Bank
It is also interesting to note that Bank Indonesia did not mention the looming US interest rate hike in its statement regarding yesterday’s BI rate cut. The institution did, however, mention that quantitative easing in the Eurozone will most likely result in capital inflows into Indonesia. This may be an indication that the central bank of Indonesia believes that the impact of higher US interest rates on Indonesia’s financial stability will be rather small, particularly if this impact (referring to possible capital outflows) can be cushioned by inflows from the Eurozone. This could then mean that another interest rate cut in Indonesia this year may be possible.
By 11:25 am local Jakarta time, the benchmark stock index of Indonesia (Jakarta Composite Index) had climbed 1.01 percent to 5,391.21 points on Wednesday (18/02). The finance sector index had climbed 2.06 percent while the construction sector index had risen 2.79 percent. Shares of Astra International, the largest listed Indonesian company in terms of market capitalization and the company that can be regarded as the benchmark for the whole index due to the company’s presence in various sectors, soared 1.60 percent.
However, based on the Bloomberg Dollar Index, the Indonesian rupiah exchange rate had depreciated 0.35 percent to 12,806 per US dollar by 11:40 am local Jakarta time. Most emerging currencies in Asia slid ahead of the release of the US Federal Reserve minutes of its latest policy meeting. This year so far, Indonesia’s currency is the worst performer among ten Asian currencies tracked by Bloomberg (against the US dollar). This weak performance is particularly due to the country’s wide current account deficit. Yesterday (17/02), Senior Bank Indonesia Deputy Governor Mirza Adityaswara said that the shortfall in the country’s current account balance - the broadest measure of trade - will probably be about 3 percent of gross domestic product (GDP) in 2015, compared with 2.95 percent of GDP in 2014.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.37 percent to IDR 12,804 per US dollar on Wednesday (18/02).
| Source: Bank Indonesia