Most analysts agree that the central bank of Indonesia (Bank Indonesia) will leave its interest rate regime unchanged at the Board of Governors’ Meeting that is scheduled for Tuesday 14 July 2015. Indonesia’s central bank is expected to maintain its key interest rate (BI rate) at 7.50 percent, the overnight deposit facility rate (Fasbi) at 5.50 percent, and the lending facility rate at 8.00 percent as the country’s inflation rate has recently accelerated while the rupiah has been under pressure due to external factors.

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The International Monetary Fund (IMF) cut its forecast for global economic growth in 2015 to 3.3 percent (y/y), from 3.5 percent (y/y) previously, as the harsh winter impacted on the US economy and drags down global growth accordingly. In the first quarter of 2015, the US economy contracted 0.2 percent (y/y). Moreover, turmoil in Greece and China cause great volatility on international financial markets, the Washington-based institution said in an update to its World Economic Outlook (WEO) on Thursday (09/07).

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Indonesia’s foreign exchange reserves fell USD $2.8 billion to USD $108.0 billion at the end of June 2015 (from USD $110.8 billion one month earlier). This fall was caused by foreign debt repayment and the use of foreign exchange to stabilize the rupiah exchange rate. Due to external pressures (particularly looming further monetary tightening in the USA this year and the possible Greek exit from the euro), the rupiah is the worst performing Asian currency tracked by Bloomberg so far in 2015, weakening about 7 percent against the US dollar.

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The latest survey of Bank Indonesia shows that consumer confidence in Indonesia has fallen in June 2015 on fears of shrinking job availability as well as declining income and business activity. Last month, the central bank’s Consumer Confidence Index fell 1.5 points to 111.3. This year so far, Indonesian consumer confidence only rose in May. In other months the index fell. Bank Indonesia’s Consumer Confidence Index is based on samples of 4,600 households in 18 major cities in Indonesia (100 separates optimism from pessimism).

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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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Indonesia’s inflation accelerated to 7.26 percent year-on-year (y/y) in June 2015 on higher food prices triggered by the start of the Ramadan month (the Islamic fasting month). The seasonal Ramadan and subsequent Idul Fitri celebrations always cause inflationary pressure in Indonesia as consumers increase spending. Despite Indonesian purchasing power having declined in recent months, reflected by slowing car and motorcycle sales, cheaper consumer goods such as food, clothes, shoes and bags are popular.

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In line with markets' expectation the central bank of Indonesia (Bank Indonesia) kept its benchmark reference interest rate (BI rate) unchanged at 7.50 percent on Thursday (18/06). Bank Indonesia remains committed to its relatively tight monetary stance in a bid to combat accelerated inflation, limit the country's wide current account deficit, and support the ailing rupiah. The central bank also kept its overnight deposit facility rate (Fasbi) and lending facility rate at 5.50 percent and 8.00 percent, respectively.

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The central bank of Indonesia (Bank Indonesia) is expected to leave its interest rate regime unchanged at Thursday’s Board of Governor’s meeting. Currently, Bank Indonesia’s key interest rate (BI rate) stands at 7.50 percent, the overnight deposit facility at 5.50 percent, and the lending facility rate at 8.00 percent. The central bank seems committed to this relatively high interest rate environment as the country’s inflation accelerated to 7.15 percent (y/y) in May, while the rupiah touched a 17-year low on 9 June 2015.

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Indonesia's central bank (Bank Indonesia) is well aware of the continuation of the "currency war" as a side-effect of further monetary tightening in the USA. Bank Indonesia Governor Agus Martowardojo said on Monday (08/06), quoted by state news agency Antara, that he sees a currency war continuing over the next three years provided that the Federal Reserve starts to tighten its monetary approach gradually. Markets expect the Fed to raise US interest rates in September 2015.

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The latest Consumer Confidence Index, compiled by the central bank of Indonesia (Bank Indonesia) shows that Indonesian consumers have become more optimistic about their economic prospects in May 2015. The index rose to 112.8 points in May, up 5.4 points from the preceding month (a score higher than 100.0 signal consumer optimism). It was the first time this year that Bank Indonesia’s Consumer Confidence Index, which is based on a sample of 4,600 household in 18 major Indonesian cities, increased.

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Contrary to expectations, the central bank of Indonesia (Bank Indonesia) left its monetary policy unchanged at the July policy meeting. The benchmark interest rate (BI rate) was kept at 6.50 percent, while the deposit facility rate and lending facility rate were kept at 4.50 percent and 7.00 percent, respectively. The 7-day reverse repurchase rate, which is set to become the central bank's new benchmark on 19 August 2016 - replacing the BI rate - was left at 5.25 percent.

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In the first three policy meetings of 2016, Indonesia's central bank (Bank Indonesia) cut its benchmark BI rate gradually yet aggressively from 7.50 percent to 6.75 percent as inflation, the rupiah rate and Indonesia's current account deficit were regarded as 'under control'. At the same time, Indonesia's lender of last resort acknowledged the BI rate has failed to influence borrowing costs and market liquidity effectively and therefore decided to adopt the seven-day reverse repurchase rate (reverse repo) as the nation's new benchmark starting from August 2016.

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The central bank of Indonesia (Bank Indonesia) revised down its projection for Indonesia's economic growth in 2016 to the range of 5.0 - 5.4 percent (y/y), slightly below its previous forecast in the range of 5.2 - 5.6 percent (y/y). Bank Indonesia Governor Agus Martowardojo said the central bank decided to trim its projection for gross domestic product (GDP) growth this year due to sluggish global economic growth, low commodity prices, and Indonesia's slightly disappointing Q1-2016 GDP growth figure at 4.92 percent (y/y).

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Indonesia's balance of payments registered a deficit in the first quarter of 2016. Based on the latest data from Indonesia's central bank (Bank Indonesia), the deficit stood at USD $287 million in Q1-2016, down from a USD $1.3 billion surplus in the same quarter last year. The balance of payments deficit was the result of the nation's Q1-2016 capital and financial transaction surpluses (USD $4.17 billion) not being able to cover the current account deficit (CAD). Indonesia's Q1-2016 CAD shrank to USD $4.67 billion, or 2.14 percent of the nation's gross domestic product (GDP).

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If we look back on the month of April, two important matters - related to the economy - occurred in Indonesia this month: (1) in the first week of April, the Indonesian government managed to complete the Revised 2016 State Budget (RAPBN-P 2016), and, one week later, (2) the central bank (Bank Indonesia) announced it will adopt a new benchmark monetary tool per 19 August 2016 - the so-called seven-day reverse repurchase rate - that is to replace the existing BI rate (which fails to influence market liquidity effectively).

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The central bank of Indonesia (Bank Indonesia) expects to see deflation in April 2016 on the back of controlled food prices as the harvest season has arrived. Bank Indonesia Governor Agus Martowardojo said a central bank survey shows deflation of 0.33 percent month-to-month (m/m) during the first three weeks of April. Besides lower food prices, Martowardojo also attributes April deflation to the government's decision to cut fuel prices (premium gasoline and diesel) by IDR 500 (approx. USD $0.04) per liter per 1 April. This move led to a 4 percent drop in public transportation tariffs.

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The central bank of Indonesia (Bank Indonesia) announced on Friday (15/04) it will adopt a new monetary tool per 19 August 2016 that is to replace the existing BI rate which is considered too inefficient to influence market liquidity as it is not directly tied to Indonesia's money markets. The seven-day reverse repurchase rate (reverse repo), which stood at 5.50 percent in the central bank's last auction, is to become the nation's new benchmark. Bank Indonesia Governor Agus Martowardojo, who communicated through a teleconference from Washington DC, emphasized that the central bank will not change its monetary stance.

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In line with expectation, the central bank of Indonesia (Bank Indonesia) cut its benchmark interest rate (BI rate) by 25 basis points to 6.75 percent on Thursday (17/03) at its two-day policy meeting. It is the third straight month of monetary easing in Southeast Asia's largest economy. In the preceding two months the lender of last resort had also cut borrowing costs by 0.25 percent, each month. Furthermore, the deposit and lending facility rates were also cut by 25 basis points to 4.75 percent and 7.25 percent, respectively (effective per 18 March 2016).

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The central bank of Indonesia (Bank Indonesia) expects to see deflation at 0.15 percent month-to-month (m/m) in February 2016. Bank Indonesia Governor Agus Martowardojo said lower (government) administered prices in combination with low core inflation will be the recipe for deflation in the second month of the year. The lower administered prices that are primarily the cause of deflation consist of fuel prices, air fares and 12-kilogram liquefied petroleum gas (LPG) canisters. In the first month of the year Indonesian inflation accelerated to 4.14 percent (y/y).

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The central bank of Indonesia (Bank Indonesia) is expected to keep its benchmark interest rate (BI rate) relatively high in order to safeguard Indonesia's financial stability in 2016 (instead of seeking accelerated economic growth through a rate cut). Despite easing pressures on inflation and the country's current account balance, Bank Indonesia Governor Agus Martowardojo said that persistent global uncertainty (referring to the looming US Fed Fund Rate hike and China's slowdown) justifies the tight monetary stance.

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