Bank Indonesia Maintains Benchmark Interest Rate Despite 25 bps Fed Fund Rate Hike

The Bank Indonesia (BI) Board of Governors meeting held on December 19-20, 2018, decided to maintain the BI 7-day Reserve Repo Rate at 6%. Bank Indonesia believes that this policy interest rate remains consistent with efforts to reduce the current account deficit within safe limits and maintain the attractiveness of domestic financial assets.

Throughout this year, BI has raised its benchmark interest rate six times by a total of 175 bps to 6% from the previous level of 4.25 bps. Global uncertainty, the impact of The Fed's interest rate hikes, and the threat of a trade war caused the Indonesian Rupiah to weaken to Rp 15,200/US dollar. Therefore, BI raised its benchmark interest rate to stabilize the Rupiah and curb the outflow of foreign funds.

The day before, The Fed raised its benchmark Fed Funds Rate by 25 bps to 2.5%. This was the fourth increase this year to curb US inflation, which had reached 2.9%, exceeding the target of 2%. For next year, the US central bank lowered its projection for benchmark interest rate increases to two times from the previous projection of three times. The current interest rate differential between the Rupiah and the US dollar is 350 bps, significantly higher than the beginning-of-year position of only 2.75 bps.