Indonesia's central bank maintained its main interest rates, including the BI rate at 7.50 percent, saying this rate was consistent with its efforts of keeping inflation within its target corridor and part of its measures that "anticipate possibilities of a fed fund rate hike" by the U.S. Federal Reserve.
But Bank Indonesia (BI), which cut its rate by 25 basis points in February, added that economic growth in the United States was higher than previously projected, but China's devaluation of its yuan could undermine U.S. exports, which meant that uncertainty concerning the Federal Reserve's increase in the fed funds rate had lingered, "with the increase now expected towards year end."
Later today the Federal Reserve will issue its policy decision, with markets split on whether it will raise the fed funds' rate, held at the current level of 0-0.25 percent since December 2008.
In the near term, Bank Indonesia said its policy will continue to focus on stabilizing the rupiah currency "by optimizing monetary operations," strengthening forex supply and demand management, while continuing to deepen the money market.
BI acknowledged its intervention in the foreign exchange market and attributed recent depreciation of the rupiah from China's devaluation of its yuan combined with uncertainty over the proposed fed fund hike in the U.S..
In addition, a surge in domestic demand for U.S. dollars to service foreign debt had also "exacerbated the rupiah overshoot," BI said.
The rupiah has been depreciating since April 2014 but its decline picked up speed in August, when it fell by an average of 2.9 percent from July, BI said. Today the rupiah was trading at 14,481 to the dollar, down 14 percent since the start of the year.
Indonesia's economy is forecast to accelerate in the third quarter of this year, with household consumption showing signs of improvement and investment is expected to rise in connection with greater government spending on infrastructure projects, such as toll roads, power stations and dams.
BI also expects exports to continue to slowly improve as the global economy recovers, and for 2015 growth is projected in the 4.7 to 5.1 percent range.
In the second quarter, Indonesia's Gross Domestic Product expanded by 3.78 percent from the first quarter for annual growth of 4.67 percent, slightly below the first quarter's 4.72 percent.
BI still expects to attain its 2015 inflation target of 4.0 percent, plus/minus 1 percentage point, though August inflation only eased to 7.18 percent from July's 7.26 percent.
BI said inflationary pressures were still controlled by anchored expectations and domestic moderation while changes to various transportation fares, especially airfares, intra-city fares and rail fares contributed to administered price deflation while prices of various foods increased, such as ready-to-consume foods, and education fees rose.
BI Governor Agus Martowardojo recently said he expected inflation to drop to 7.08 percent in August and the central bank would have room to cut rates later this year as inflation cools.
Bank Indonesia issued the following statement: