BI 7-day Reverse Repo Rate Raised by 25 bps to 4.75%: Pre-emptive Policy to Strengthen Stability - Bank Sentral Republik Indonesia
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November 20, 2019

No.20/ 46/DKom

The BI Board of Governors agreed on 30th May 2018 to raise the BI 7-day Reverse Repo Rate by 25 bps to 4.75%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 25 bps to 4.00% and 5.50% respectively, effective 31st May 2018. Bank Indonesia made the policy as pre-emptive, front-loading, and ahead-of-the-curve moves to strengthen stability, especially exchange rate stability against a higher than expected Fed Fund Rate (FFR) hike and increasing risk in the global financial market. Bank Indonesia believes that Indonesia’s overall economic condition is considerably sound and strong. Pressures on stability which begun in February is mostly related to the trend of FFR hike as well as increased global uncertainty due to policy change in the US and a number of geopolitical risks. Moving forward, Bank Indonesia will continue to calibrate updates in the global and domestic economy to make use of available room to raise policy rate, in a measured way.

The decision to raise policy rate is part of Bank Indonesia’s short term policy, which prioritise stability in monetary policy, especially for the Rupiah exchange rate. First, a pre-emptive, ahead-of-the-curve and front-loading policy rate response will be taken to stabilise the rupiah exchange rate, while consistently controlling inflation within the 2018-2019 target range of 3.5±1%. Second, Bank Indonesia will continue to optimise dual intervention in the foreign exchange market and government securities (Surat Berharga Negara – SBN) market to stabilise rupiah exchange rates, adjust fair prices in the financial markets and maintain adequate liquidity in the money market. Third, the monetary operations strategy will be oriented towards maintaining adequate liquidity in the rupiah money market and interbank swap market. Fourth, intensive communication with market players, the banking industry, business community and economists will be used to form rational expectations, thus helping to mitigate the rupiah overshooting the currency’s fundamental level.

The pressures on stability, particularly in the Rupiah exchange rate, tend to originate from policy change in the United States (US) which affects all countries, including Indonesia. The economic gains and rising inflation in the United States are placing added pressure on the Federal Reserve to hike the Federal Funds Rate (FFR), with some market players expecting aggressive hikes up to four times this year. A higher expectation of policy rate hike in the US is also attributed to the fiscal deficit, which is predicted to reach around 4% of GDP this year and 5% of GDP in 2019. Those two policy changes have sparked a vertiginous increase in the US Treasury Bond yield and US dollar appreciation against nearly all global currencies. Global financial market uncertainty has also escalated, triggered by the looming US-China trade war, coupled with simmering regional geopolitical tensions. Prevailing global developments have prompted a foreign capital outflow and amplified pressures on financial markets in advanced economies and emerging market economies (EMEs), including Indonesia, manifesting in lower stock prices, higher bond yields and exchange rate depreciation against the US dollar. Indonesia’s economy remains considerably resilient to external pressures, as effectively demonstrated in previous periods of global shocks.

Indonesia’s overall economy remains sound as was assessed in the 16-17 May 2018 BI Board of Governors Meeting. Low inflation is maintained within the inflation target of 3.5±1% in 2018. Economic growth remain well, underpinned by increased investment, both building and nonbuilding investment. The current account deficit improved from the previous quarter and for 2018 is expected to remain below 2.5% of GDP. Financial system stability remains solid with improving credit disbursement. Government, Bank Indonesia, Financial Services Authority of Indonesia, and Indonesia Deposit Insurance Corporation continue to strengthen coordination to maintain economic stability and growth sustainability. On Bank Indonesia’s side, a number of steps are being prepared as a follow up, namely macroprudential policy easing and efforts on financial market deepening, especially in private financing for infrastructure.

Jakarta, 30th May 2018
Communication Department

Agusman
Executive Director

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