Indonesia’s central bank left its benchmark 7-day reverse repurchase rate (RR) at 4.75 percent, as expected, and confirmed that it expects the country’s economy to grow between 5.0 and 5.4 percent this year, supported by stronger exports and investments along with “tenacious consumption.”
Bank Indonesia (BI) has maintained its rate since October 2016 when it last cut its rate. From January through June last year BI lowered its previous benchmark rate four times by a total of 100 basis points and then cut the current RR rate by a total of 50 basis points in August and October.
Indonesia’s Gross Domestic Product grew by an annual rate of 5.01 percent in the first quarter of this year, up from 4.94 percent in the first quarter, helped by higher government spending on infrastructure projects, improved exports and higher commodity prices, especially of coal and rubber.
Last year Indonesia’s economy grew by 5.02 percent, up from 4.88 percent in 2015.
While BI expects the global economy to improve, it noted several risks, including the Federal Reserve’s expected rate hike in June and the reduction in its balance sheet, U.S. fiscal and trade policies, and the geopolitical condition in the Korean Peninsula.
“As global economic growth improves, world trade volume and non-oil commodity prices increase,” the BI said.
Domestically, BI is keeping a close eye on the impact on inflation from administered prices.
Indonesia’s headline inflation rate rose to 4.17 percent in April from 3.61 percent in March, still within the bank’s target range of 4.0 percent, plus/minus 1 percentage point.
Administered prices were the main contributor to higher consumer prices, with a rise in electricity rates for some users, airfares, petrol and cigarette prices. From March administered prices were up 1.27 percent in April for an annual rise of 8.68 percent wile volatile food prices fell by a monthly 1.26 percent due to an abundant supply.
Core inflation, however, eased to 3.2 percent in April from 3.3 percent in March, helping anchor inflation expectations and the appreciating rupiah, BI said.
After falling sharply from June 2013 through October 2015, the rupiah has been more stable in 2016 and this year.
“Rupiah appreciation was driven by maintained non-resident capital inflows after the sovereign rating outlook was upgraded, solid macroeconomic data was released and positive sentiment regarding the domestic economic outlook prevailed,” BI said.
But shortly after today’s BI’s decision, the rupiah dropped sharply to around 1,3454 a U.S. dollar from around 1,3320. Compared with the start of this year, the rupiah is up 0.3 percent.
Bank Indonesia issued the following statement: