Jakarta – Bank Indonesia, the country's central bank, has eased off the accelerator with a decision to raise its benchmark interest rate by only 25 basis points to 5.50 percent on Thursday, citing the slowing inflation and inflation expectation as its primary reason.
The increase was lower than the 50 basis points raise the market expected, similar to the rate of increase in each of the past three months as Bank Indonesia sought to curb domestic inflation and closely track the US Federal Fund Rate increases to dampen capital outflows.
Still, for Bank Indonesia Governor Perry Warjiyo, the pressures from the inflation front were not as severe as before.
"The hint is clear. Inflation has slowed down. The inflation expectation is also in decline," Perry said in a press briefing after the central bank's monthly policy meeting.
He said the latest raise was to ensure that the decline in inflation expectations and inflation would continue. Perry said the central bank expected core inflation would remain below 3.5 percent by the end of this year, well within its target of 2-4 percent.
The headline inflation in Indonesia has been downward in the past three months, with the consumer price index (CPI) rising by 5.42 percent. This marks a significant improvement from the 5.71 percent increase seen in the preceding months.
He said the headline inflation would continue to decline in Indonesia, reaching below 4 percent by the second half of next year.
However, the pressures from external shocks remain strong, leading the central bank to introduce policies aimed at stabilizing the rupiah.
"The policy to stabilize the exchange rate of the rupiah continues to be strengthened to control imported inflation, in addition to mitigating the spillover effects of the still strong US dollar and high global financial market uncertainty," Perry said.
Perry said that Bank Indonesia also introduced a new foreign exchange operation instrument, allowing domestic banks to keep export proceeds, specifically those derived from natural resources, with the central bank at more competitive rates than overseas banks.
In addition, the central bank expected its latest policies – including easing the minimum reserve requirements for banks with loans to small and medium enterprises, 43 prioritized sectors, and sustainable financing – should allow more room for the country to maintain its growth recovery.
Perry said the central bank now projected Indonesia's $1 trillion economy should expand by around 4.9 percent next year, at the midpoint of its projection range of 4.5-5.3 percent.