Bank Indonesia hikes key interest rate by 25 bps, likely to hike again in December

The Indonesian central bank met today for it monetary policy meeting. Bank Indonesia raised its 7-day reverse repo policy rate by 25 basis points to 5.75 percent. The deposit and lending facility rates were also hiked to 5 percent and 6.50 percent, respectively.

Even if the magnitude of the rate rise was smaller than anticipated, the central bank reiterated that will take measures to steady the IDR both in terms of volatility and guarantee its consistency with fundamental value. In this regard, it underlined the ongoing uncertainty in global financial markets and inequality in global growth. Financial market volatility and lop-sided growth in the U.S. are encouraging investors to invest in assets there.

However, the central bank seems more optimistic on prospects for a smaller current account deficit in response to government measures to lower imports. The current account deficit is likely to narrow to 2.5 percent of GDP in 2019, from 3 percent of GDP in the second quarter 2018. The surplus in the non-oil and gas trade balance in August was cited as a favourable development.

Meanwhile, growth and inflation forecasts were kept the same. The BI kept GDP forecast range unchanged at 5 to 5.4 percent for 2018 and at 5.1 percent to 5.5 percent for next year. The mild acceleration in 2019 was linked to election-related and infrastructure spending.

“We are less optimistic and forecast 2019 GDP growth at 5 percent. Tighter fiscal and monetary policies are likely to impact growth, in our view”, stated ANZ in a research report.

Meanwhile, BI reiterated that the headline inflation will stay in the target band of 2.5 percent to 4.5 percent in 2018.

According to an ANZ Bank, the BI is likely to hike interest rate two more times by 25 basis points in December 2018 and in June 2019.

“Given the uncertainty in financial markets, it is unlikely that monetary policy in Indonesia will diverge from that of the US Fed. For comparison, BI expects four more Fed rate hikes in 2018 and 2019, and this poses upside risks to our BI policy rate call”, added ANZ.