Bank Indonesia keeps its benchmark rate on hold in July policy meet

The Board of Governors of Bank Indonesia on Thursday decided to keep the BI Rate on hold at 6.5 percent. The central bank also kept the deposit facility and lending facility rates unchanged at 4.5 percent and 7 percent respectively.

The BI 7-Day (Reverse) Repo Rate was also maintained at 5.25 percent. In its statement, the central bank mentioned that the macroeconomic stability continues to be stable as shown by low and stable inflation within the target corridor of 4 percent, plus or minus 1 percent, a stable exchange rate and healthier current account deficit.

Bank Indonesia stated that monetary policy transmission through interest rate has continued to rebound and that preparations for policy, rate reformulation are under process that will be effective from August 19. The central bank stated that it is positive that easier monetary and macroprudential policies would strengthen the economic growth momentum.

Moreover, the Indonesian central bank underpins the 2016 Tax Amnesty Law implementation. The policy is likely to stimulate the fiscal capacity of government to fund development programs and also possibly enhance national economic liquidity that would then be used domestically for constructive economic activities.

Bank Indonesia mentioned that it will continue to carry out financial market deepening by introducing new hedging products and new investment in the financial market, bolster monetary management strategies and urge the real sector to make use of repatriation funds. It stated that it will also carry on coordinating with the government to guarantee the implementation of Tax Amnesty Law can be beneficial to the economy.

The central bank projects the global economy to grow more slowly consistent with increasing uncertainty following Brexit vote. It also expects oil price to be at comparatively low level in line with extremely weak demand.

On the domestic economy front, the central bank projects the economic growth to gather momentum in the coming months on back of loose monetary and macroprudential policy, along with fiscal stimuli. Bank Indonesia forecasts the economy to expand in the range of 5 percent to 5.4 percent this year.

Given that the economic growth is expected to have improved modestly in the second quarter and is also likely to rebound in the second half of 2016, the introduction of efficient monetary policy transmission mechanism in August and tax amnesty inflows expected to take place in the fourth quarter, the requirement to loosen monetary policy further would be greatly lowered, said ANZ in a research note.

“Hence, we now expect that any further adjustment to monetary policy is likely to be limited to a ‘fine tuning’ of the 7-day reverse repo rate on its introduction as the new policy instrument on 19 August”, added ANZ.