Slowly but surely Indonesia is obtaining the investment grade rating from the world's three key credit rating agencies. Fitch Ratings already reinstated Indonesia's investment grade rating in 2011, a step that was followed by Moody's Investors Service in 2012. Although Standard & Poor's (S&P) has been more careful, there emerged speculation that S&P will assign the investment grade status to Indonesia soon (perhaps in June 2016). Last week, a S&P team visited Indonesia - to study the country's latest policy reforms and developments - and signaled that its assessment is positive.

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The central bank of Indonesia (Bank Indonesia) kept its key interest rate (BI rate) at 6.75 percent at the April policy meeting. This decision was in line with expectations. During the three policy meetings conducted in the January-March 2016 period Bank Indonesia had already cut its BI rate by a combined 75 basis points as inflation and the current account deficit are under control, while the Indonesian rupiah has been strengthening against the US dollar since the start of 2016. Last week, Bank Indonesia announced it will adopt the seven-day reverse repurchase rate (reverse repo) to replace the existing BI rate as the bank's key monetary tool.

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The central bank of Indonesia (Bank Indonesia) plans to adopt a new tool of monetary policy that is to replace the existing benchmark interest rate (BI rate). On Friday (15/04), Bank Indonesia will announce and elaborate on the new policy. Earlier, Indonesia's central bank said it was studying the implementation of a seven-day reverse repurchase rate (reverse repo) as the nation's new benchmark that is to influence borrowing costs and market liquidity more effectively. The new policy would mean Bank Indonesia sells securities with an agreement to buy them back within a seven-day period.

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In the first three monthly policy meetings this year (January-March) the central bank of Indonesia (Bank Indonesia) cut borrowing costs by a total of 75 basis points. Indonesia's benchmark interest rate (BI rate) was cut from 7.50 percent at the year-start to 6.75 percent at Thursday's Board of Governors' meeting. The overnight deposit facility rate and lending facility rate were also cut by 75 basis points, each, in the first three months. The lower interest rate environment in Indonesia signals that the financial fundamentals are strong. This is partly reason behind strong inflows of foreign capital into Southeast Asia's largest economy.

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Shares of Indonesian banks were hit hard on Friday (19/02) after Indonesia's Financial Services Authority (OJK) announced its plan to push state-owned banks net interest margin (NIM) to the range of 3 to 4 percent in a bid to lower the country's lending rates, hence boosting credit growth. NIM is the difference between interest income generated by banks and the amount of interest paid out to the lenders. A higher NIM implies that banks are more profitable. Currently, the average NIM for Indonesia's state-owned banks is between 7 - 8 percent.

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The Indonesian government, central bank (Bank Indonesia) and the Financial Services Authority (OJK) have formed a team that will study and encourage lower lending and mortgage rates in Indonesia - to single digit levels - by the end of 2016. Indonesia's Chief Economics Minister Darmin Nasution explained that this is part of government efforts to boost economic activity in Southeast Asia's largest economy. Indonesia's lending rates have been high due to banks' prudent management and the high cost of funds, hence limiting credit growth as well as economic growth.

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On 1 July 2015, Bank Indonesia’s BI Regulation No. 17/3/PBI/2015 regarding the Mandatory Use of the Rupiah in Indonesia came into effect. This BI Regulation, signed on 31 March 2015, restricts the use of foreign currencies in transactions conducted in Indonesia with the aim to deepen the domestic rupiah market, stabilize the rupiah (which has been depreciating against the US dollar), and foster economic expansion. A previous law (Law No. 7/2011) allowed for involved contract parties to agree using another currency (than the rupiah) for payments.

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After a series of good economic data (particularly US employment) the market expects that the Federal Reserve will raise its key interest rate in the second or third quarter of 2015 thus providing ammunition for bullish US dollar momentum (hovering at an 11-years high). Due to the expected higher yield in the USA, capital is flowing back to the world’s largest economy at the expense of emerging market currencies, including the Indonesian rupiah exchange rate which has depreciated 6 percent against the US dollar this year so far.

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Benedict Bingham, Senior Resident Representative for Indonesia at the International Monetary Fund (IMF), expects that the central bank of Indonesia (Bank Indonesia) will remain committed to the tighter monetary policy in a bid to safeguard the country’s fiscal fundamentals amid external pressures. Apart from sluggish global economic growth, the looming interest rate hike in the USA (later this year) is expected to rock Indonesia as it will trigger capital outflows from emerging markets.

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Nanang Hendarsah, Deputy of Bank Indonesia’s financial task force, said that the central bank of Indonesia will issue two new regulations this week in an attempt to boost foreign exchange (FX) transactions in Indonesia by simplifying the bank’s previous regulations issued in 2005 and 2008 (PBI No. 10/28 on FX purchase at banks and PBI No. 10/37 on netting restrictions). Recent data from Bank Indonesia show that the amount of FX transactions in Indonesia has been lower compared to those recorded by its regional peers.

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In September 2020 concern arose over whether the House of Representatives (DPR) is trying to undermine the country’s central bank (Bank Indonesia)’s independence (from the government). The DPR’s legislation body came with a bill (a draft revision of the Bank Indonesia Law) that contains a number of controversial articles, making analysts concerned about the quality of future monetary policymaking in Indonesia.

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In February 2020 all eyes were on the novel coronavirus outbreak and its impact on the global financial markets. Especially when the new virus spread across European countries toward the end of the month, market participants started selling their assets, causing huge sell-offs around the globe.

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The central bank of Indonesia (Bank Indonesia) decided to cut its benchmark interest rate ("BI seven-day reverse repo rate") by 25 basis points (bps) to 4.75 percent at the two-day policy meeting on 19 and 20 February 2020.

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At the annual “Fitch Ratings Indonesia Credit Briefing”, which was organized on 20 March 2019 in the Mandarin Oriental Hotel in Jakarta, Indonesian Finance Minister Sri Mulyani Indrawati was invited to present her keynote speech. This year's theme of Fitch Ratings’ annual event in Jakarta was "The Election, Macro-Economy and Credit Market", and therefore Sri Mulyani’s speech focused on two topics: (1) the elections and (2) the economy.

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In line with expectations, the central bank of Indonesia (Bank Indonesia) kept its benchmark BI 7-Day Reverse Repo Rate at 6.00 percent at the February policy meeting that was held on 20-21 February 2019. Also the deposit facility and lending facility rates were kept at 5.25 percent and 6.75 percent, respectively.

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In line with expectations, the central bank of Indonesia (Bank Indonesia) left its interest rates unchanged at the last monetary policy meeting of 2018 (held on 19-20 December 2018). The benchmark BI 7-Day Reverse Repo Rate was held at 6.00 percent, while the deposit facility and lending facility rates were kept at 5.25 percent and 6.75 percent, respectively.

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Bank Indonesia decided to hold the BI 7-day Reverse Repo Rate at 5.25 percent during the July 2018 monthly policy meeting. It also maintained the deposit facility and lending facility rates at 4.50 percent and 6.00 percent, respectively. Bank Indonesia believes the rates are consistent with its efforts to maintain domestic financial market attractiveness against a backdrop of pervasive uncertainty on global financial markets.

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Chief executive officers (CEOs) in Indonesia have become slightly less optimistic about the Indonesian economy and politics. This makes sense considering the presence of simmering global trade tensions, sharp rupiah depreciation against the US dollar, and Bank Indonesia's recent series of interest rate hikes.

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This week two domestic events need to be carefully watched by those who invest in Indonesian assets: (1) the local elections that are scheduled for Wednesday 27 June, and (2) Bank Indonesia's monthly policy meeting that is scheduled for 27-18 June. Lets take a closer look at these events.

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For the first time in four years Bank Indonesia opted for monetary tightening by raising the benchmark interest rate (the 7-Day Reverse Repo Rate) by 25 basis points (bps) to 4.50 percent. Also the deposit facility and lending facility rates were raised by 25 bps to 3.75 percent and 5.25 percent, respectively (effective per 18 May 2018). This latest move is part of Bank Indonesia's efforts to maintain economic stability amid the high degree of uncertainty in global financial markets.

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