Indonesia Refrains From Raising Key Interest Rate as Economic Growth Eases

Indonesia’s central bank kept interest rates unchanged for a third straight month to bolster slowing economic growth, relying on an appreciating currency to contain inflation.

Bank Indonesia kept its benchmark reference rate at 6.75 percent, it said in a statement in Jakarta today. The decision was predicted by all 10 economists surveyed by Bloomberg News.

“Easing inflation and the central bank’s thinking that they’re capping inflation gains with a stronger rupiah is giving them support to hold the rate,” said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore. “They have time to postpone any rate hike to the latter part of the year.”

Indonesia has refrained from boosting borrowing costs since its first rate increase in more than two years in February, in contrast with neighbors from Malaysia to India where officials have accelerated monetary tightening. While the country’s policy measures have helped ease inflation, authorities “can’t be complacent,” Deputy Governor Hartadi Sarwono said in a mobile- phone text message today.

“Bank Indonesia is being prudent in its policy making so as to allow the economy to reach growth targets and support infrastructure development,” Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta, said before the decision. “It is still in a tightening mode amid pressure from commodity prices and is likely to raise rates once more this year.”

Fuel Subsidies

President Susilo Bambang Yudhoyono’s policy makers have extended fuel subsidies and let the rupiah climb the most in Asia after Taiwan this year to contain inflation. Economic growth slowed to 6.5 percent last quarter as investment eased, after climbing 6.9 percent in the previous three months.

The Indonesian rupiah climbed to its strongest level since 2004 this month and has gained about 5 percent this year, according to data compiled by Bloomberg. The currency fell 0.3 percent to 8,553 against the dollar as of 2:34 p.m. in Jakarta, paring a decline of as much as 0.4 percent earlier.

Indonesia’s exchange-rate movements are still in line with efforts to curb inflation, while keeping the momentum of economic growth, the central bank said. The rupiah’s gains so far have had no negative impact on the competitiveness of domestic products and the country’s export performance is forecast to remain strong, it said.

Consumer prices in Indonesia, Southeast Asia’s largest economy, rose 6.16 percent last month from a year earlier, slower than the 6.65 percent pace in March. Prices fell in April from March. Core inflation accelerated to 4.62 percent from 4.45 percent.

Watching Commodities

Bank Indonesia will continue to closely watch inflation pressures, especially those that are derived from international commodity prices, the rise in domestic demand and government policy related to fuel subsidies and the possibility of disruptions to food supplies,” the central bank said today.

Indonesia may need to resume rate increases later this year should price pressures climb, according to Bambang Brodjonegoro, the finance ministry’s head of fiscal policy. The central bank expects inflation to reach 4 percent to 6 percent this year before easing to a range of 3.5 percent to 5.5 percent in 2012, it said today.

“By maintaining the rate at the current level, purchasing power will increase” and boost home and vehicle purchases, said Jahja Setiaatmadja, vice president director at PT Bank Central Asia in Jakarta. The country’s largest financial services company by market value has no plans to raise mortgage rates for the next three months as the benchmark stays unchanged, he said.

Growth Forecast

Private consumption provided the main support for economic growth in the first quarter, contributing 2.6 percentage points of the expansion, according to Rusman Heriawan, chairman of the statistics office. Bank Indonesia estimates the economy may expand 6.4 percent in the second quarter.

Growth in 2011 may reach the upper end of the forecast range of 6 percent to 6.5 percent, the central bank said today. The risk of inflation pressures in the future remains high, it said.

“With growth prospects still remaining strong, healthy loans growth and core inflation going up, there is no reason they should not normalize rates,” said OCBC’s Cahyadi, who expects two more rate increases in 2011.

Bank Central Asia expects mortgage and vehicle loans to increase 30 percent this year, while overall credit growth may climb as much as 25 percent, Setiaatmadja said. The company’s shares have risen 13 percent this year, outperforming most of its Indonesian peers, according to data compiled by Bloomberg.

Thailand, Singapore

Elsewhere, central banks from Thailand to the Philippines and Singapore are stepping up the fight against inflation through rate increases or currency appreciation as political unrest in the Middle East boosts crude oil prices. Oil traded near $100 a barrel today, and has climbed about 8 percent this year.

Policy makers around the region are also using tools other than benchmark rates to rein in liquidity that may fuel price gains. Malaysia’s central bank, in raising rates last week, ordered banks to set aside more cash as reserves for the second time this year. Bank Indonesia is extending the one-month holding period on central bank notes, or SBI, to six months, effective tomorrow.

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net; Novrida Manurung at nmanurung@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.