Bank Indonesia holds key interest rate at 6% amid global uncertainty

JAKARTA, NNA – Bank Indonesia left its key interest rate at 6 percent, as expected, to support growth in the economy amid the global slowdown triggered by the U.S.-China trade row.

The central bank left the key rate unchanged for the sixth time at its latest policy meeting that ended Thursday, after raising it to 6 percent in November last year.

The bank had raised the rate by a total of 175 basis points from 4.25 percent to stem the flow of funds out of the emerging economy to U.S. dollar assets, amid tightening by the Federal Reserve. The U.S. central bank’s pause in tightening at the start of 2019 has allowed Indonesia to put rate increases on hold without worrying about the current account deficit.

Key points:

-- The central bank also maintained the lending and deposit rates at 6.75 and 5.25 percent, respectively.

-- The bank is keeping its accommodative policy stance, saying it will work closely with the government to “stimulate domestic demand as well as boost exports, tourism and foreign capital inflows.”

-- “Global economic moderation has undermined world trade volume and prompted lower international commodity prices,” the bank said. The U.S.-China trade dispute has caused uncertainty in the global financial markets, triggering a capital flow from developing to advanced economies, it said.

Takeaway:

-- The bank said greater efforts are needed to spur domestic demand in order to offset the drag from slower exports. It is expecting domestic economic growth “below the midpoint” of its projected range of 5.0 percent to 5.4 percent for 2019.

-- Indonesia’s economy grew 5.07 percent from a year earlier in the January-March quarter, the lowest growth rate in a year, slowing from 5.18 percent in the final quarter of 2018, due to weaker consumption. Q1 GDP posted the second straight quarter-on-quarter contraction, down 0.52 percent, after shrinking 1.69 percent in Q4.

-- Looking ahead, Bank Indonesia expects foreign capital inflows to continue, precipitating a balance of payments surplus this year. The bank projects a narrower current account deficit in 2019 compared to 2018, in a range of 2.5 percent to 3.0 percent of GDP.

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