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

Bank Indonesia surprisingly raised its 7-day reverse repo rate by 25 basis points to 6 percent today. The central bank’s decision shows its desire to lower the current account deficit and improve the attractiveness of domestic financial assets.

In spite of recent gains in the Indonesian rupiah, the Indonesian central bank opted to hike its interest rate. The BI governor Perry Warjiyo, in his policy briefing, cited the reduction of the current account deficit as a factor behind the rate decision. Indonesia’s current account deficit widened in the third quarter to 3.4 percent of GDP, and October trade data released today indicated that the trade deficit came in at USD 1.82 billion. Markedly, there was a sharp rebound in the growth rate in oil and non-oil imports.

The Indonesian central bank continues to be positive on the prospects for a smaller current account deficit. It expects the deficit to print below 3 percent of GDP in 2018, before narrowing to 2.5 percent in 2019. Recent moves in oil prices have at least been in the central bank’s favour.

The increase in policy rates was also aimed at strengthening the attractiveness of domestic financial assets in anticipation of a further hike in global interest rates in the months ahead.

In the meantime, the central bank continues to be optimistic about inflation, which it noted is still under control at a low and stable level. It tweaked its assessment of 2018 GDP growth a bit – it now expects growth to come in at 5.1 percent, compared to its previous projection of 5 to 5.4 percent.

There is a doubt that today’s hike would be the last. The prospects of additional rate hikes in the U.S. imply the external environment continues to be challenging.

“The policy messaging today also continued to signal BI’s focus on guarding the rupiah. If the financial market backdrop sours in the coming weeks, BI’s next rate hike could come as soon as its meeting in December”, said ANZ.