Indonesia Keeps Record-Low Rate as Inflation Quickens
Bank Indonesia kept its benchmark interest rate at a record low even after consumer prices rose at the fastest pace in 20 months, betting measures such as higher bank reserve requirements will keep inflation in check.
The central bank maintained its reference rate at 6.5 percent for a 17th meeting. Thirteen of 15 economists surveyed by Bloomberg News had expected the decision, announced in Jakarta today. The measure is at the lowest level since its introduction in July 2005.
“To reduce inflationary pressure, Bank Indonesia and the government will enhance policy coordination to improve the supply side,” Governor Darmin Nasution said at a press briefing in Jakarta today. “The central bank is still concerned about capital flows. Bank Indonesia will always review its policy of liquidity management and capital-inflows management and if needed, we can make adjustments to support the monetary policy.”
Indonesia ordered banks to set aside more cash as reserves to reduce inflationary pressure in 2010, while refraining from joining Malaysia, Thailand and India in boosting borrowing costs. A rate increase would risk luring more capital as Europe’s sovereign credit woes and a U.S. unemployment rate that remains above 9 percent restrain growth in developed markets, spurring funds to seek better returns in emerging economies.
“The fear of attracting further capital inflows should they hike the benchmark interest rates to fight inflation remains at the center stage,” Enrico Tanuwidjaja, an economist at OSK-DMG Group in Singapore, said in a research note after the decision.
Commodity Prices
Pressure on inflation is coming from higher commodity prices, so the central bank doesn’t need to respond by raising rates, Nasution said today. Policy makers will monitor global oil costs that may push up prices, Deputy Governor Hartadi Sarwono said at the same briefing.
Bank Indonesia “won’t hesitate” to raise its benchmark rate if core inflation exceeds 5 percent, Sarwono said Dec. 22. The current rate is consistent with Indonesia’s goal of achieving inflation of 4 percent to 6 percent in 2011 and 3.5 percent to 5.5 percent in 2012, Deputy Governor Budi Mulya said last week.
Consumer prices rose 6.96 percent last month from a year earlier, a report showed Jan. 3, exceeding the 6.71 percent median forecast in a Bloomberg survey of 14 economists. Core inflation was 4.28 percent in December, easing from 4.31 percent the previous month.
Evading Recession
Southeast Asia’s largest economy escaped a recession during the 2009 global slowdown and its expansion has pushed stocks to a record and lifted the rupiah to a three-year high. Moody’s Investors Service said last month it’s placed the nation’s Ba2 credit rating on review for a possible upgrade, citing the nation’s economic resilience and improving debt position.
The rupiah gained 4.6 percent in 2010 and reached 8,875 a dollar on Nov. 5, its strongest level since June 2007. The Jakarta Composite Index gained 46 percent last year, the best performer among Asia’s 10 biggest stock markets.
While the exchange rate is stable and there’s still a tendency for it to strengthen, there are risks, Sarwono told reporters in Jakarta today. Indonesia’s policy makers are concerned that the European debt crisis, if not resolved, may spur a “flight to quality” and boost the U.S. dollar, he said.
President Susilo Bambang Yudhoyono is targeting annual growth of 6.6 percent on average through the remainder of his term ending in 2014, and companies from PT Bank Pan Indonesia to AirAsia Bhd. are counting on rising demand in the world’s fourth-most populous nation to boost their businesses.
Business Optimism
Bank Pan Indonesia, known as Bank Panin, said last month 2010 net income may have reached about 1.5 trillion rupiah ($167 million) and loan growth may be as much as 32 percent. AirAsia, Southeast Asia’s largest budget carrier, said in November its Indonesian operations may surpass its Malaysian unit, which is now more than three times as big.
Indonesia’s economy probably grew 6.1 percent in the fourth quarter of 2010, the central bank said today. Gross domestic product probably expanded 6 percent last year, it said.
As the country’s growth lured funds, policy makers took steps to counter capital inflows. Last week, Indonesia said it would tighten rules on banks’ foreign-exchange holdings and overseas borrowing, requiring lenders to set aside 5 percent of their total foreign-exchange holdings as reserves as of March 2011, from 1 percent currently. Bank Indonesia will also reintroduce a 30 percent cap on lenders’ short-term overseas borrowing to minimize the risk of sudden capital outflows.
The Philippines and Indonesia are the only two major Southeast Asian economies using interest rates as a policy tool that didn’t raise rates last year. A recovery from the 2009 global slump has quickened inflation and raised the risk of asset bubbles in the region, prompting China, India, South Korea, Thailand, Malaysia and Vietnam to boost borrowing costs in 2010.
To contact the reporter on this story: Novrida Manurung at nmanurung@bloomberg.net
To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net
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