Bank Indonesia Expected to Keep Key Interest Rate at 7.50% at Policy Meeting
With all eyes on the two-day policy meeting of the Federal Reserve, we could almost forget that the central bank of Indonesia (Bank Indonesia) will also hold its monthly policy meeting today. Similar to the topic discussed in the Federal Open Market Committee (FOMC) meeting (16-17 September), Bank Indonesia may consider raising its key interest rate (BI rate) as a Fed Fund Rate hike would trigger capital outflows, while Indonesia’s inflation rate remains high and the rupiah is fragile.
In recent months Bank Indonesia has repeatedly stated that the rupiah, which has depreciated 16 percent against the US dollar so far in 2015, is undervalued and therefore it has been intervening heavily in the foreign exchange and bond markets to stabilize the currency. Besides safeguarding rupiah stability, the central bank also indicated that controlled inflation is a key driver of its monetary policy direction. With the current fragile state of the rupiah as well as high inflation (7.18 percent y/y in August, well above Bank Indonesia’s full-year 2015 target of 3-5 percent), this would mean that an interest rate hike is more likely to occur than an interest rate cut. Currently, the benchmark interest rate (BI rate) is already relatively high at 7.50 percent.