JAKARTA (Rambu Energy) – The central bank, Bank Indonesia, on Nov. 18, has decided to raise benchmark BI Rate by 25 basis points to 7.75 percent, the first increase in 10 months. ANZ economists views that the central bank’s decision as a symbolic monetary policy tightening.
The central bank’s decision to raise the benchmark rate is seen as a move to tame inflation rate, sparked by the recent decision of the government to raise the subsidized fuel price by Rp2,000 per liter.
On Tuesday, the central bank also raised Lending Facility rate by 50 basis points (bps) to 8.00 percent, while Deposit Facility rate is kept at 5.75 percent, effective from Nov. 19, 2014.
“The increase of BI Rate is taken to guard inflation expectation and to ensure that the inflationary pressure post subsidized fuel price remains in control, temporary and therefore it is kept at 4 plus-minus one percent in 2015,” BI said in a media statement.
The decision is also consistent with the central banks policy to manage current account deficit to a healthier condition. The increase of interest rates is aimed to maintain adequate liquidity in the financial market and helps deepen the financial market.
Symbolic monetary policy tightening
ANZ economist for ASEAN and Pacific Daniel Wilson and Chief Economist for South Asia, ASEAN and Pacific Glenn Maguire said in their daily report that they see the central bank’s (BI) decision as a “Symbolic monetary policy tightening”.
More importantly, the central bank has moved to rapidly strengthen co-ordination with the thrust of government fiscal policy and implement payments and liquidity infrastructure that will smooth the delivery of the President Joko Widodo agenda whilst minimizing inflationary pressures.
“Behind the headlines of the rate hike is a significant and multi-pronged approach (on five levels) that will better co-ordinate macro-economic policy in Indonesia and rapidly improve the allocative efficiency of the Indonesian economy,” the ANZ economists said in the report.
“With this in mind, we believe the terminal high in the policy is in place,” the ANZ economists said.
They said the rapid response rate hike is largely premised on the BI view that inflation is set to climb to 7.7-7.9 percent by the end of 2014.
“We view this assessment on inflation as rather high and have estimated inflation coming in closer to 7.3% by the end of the year. That said, the measures announced today are aimed at keeping inflation expectations anchored rather than tightening liquidity. The BI policy rate hike amid holding the deposit facility (FASBI) is more symbolic in nature, in our view,” the ANZ economists said.
They sees that the common thread linking a range of policy measures undertaken by the Indonesian central bank is “the containment of inflation expectations. Throughout the Bank’s statement there is repeated reference to minimizing inflationary pressures and/or second round effects from a range of fiscal policy moves.”
BI has also moved to expand the definition of bank deposits, a move aiming at an attempt to arrest the slowdown in credit growth.
“Ultimately this is likely to result in more accommodative liquidity conditions. Credit growth is at multi-year lows, while Bank Indonesia announced a target of 15-17 percent for growth in 2015. This compares to the most recent print 13.2 percent in October,” they said.
Going forward, ANZ views that further tightening of the policy rate will be dependent on how inflation expectations evolve.
“Given that BI expects inflation to climb as high as 7.9 percent in 2014 we believe there is plenty of room to undershoot implying the bar for additional rate hikes has been raised higher. With GDP growth at post GFC lows and credit growth still moderating we believe that liquidity tightening measures would not be favourable policy at this stage,” the ANZ economists said. (*)