Indonesia Leaves Interest Rate Unchanged to Aid Growth as Risks Increase
Indonesia’s central bank left interest rates unchanged for a sixth month, opting to protect growth after a U.S. credit-rating cut and a global stock market rout fueled concern the world economy will slow.
Bank Indonesia maintained its reference rate at 6.75 percent, it said in Jakarta today. The decision was predicted by all 20 economists surveyed by Bloomberg News. Policy makers increased the key rate in February, the only move this year.
More than $9 trillion has been wiped off stocks worldwide since the start of May as the European debt crisis and a faltering U.S. recovery darken the outlook for the global economy. Slowing inflation has given the central bank scope to defend Indonesia’s expansion by leaving rates unchanged, which bolsters consumer spending in the fourth-most populous nation.
“Inflation pressure remains manageable,” said Andry Asmoro, an economist at PT Bank CIMB Niaga in Jakarta. “The fragility in markets is temporary, and Indonesia’s outlook still looks promising as growth will continue to accelerate in the third and fourth quarters.”
Indonesia’s rupiah is up about 5 percent against the U.S. dollar in 2011, the most among major Southeast Asian currencies after Singapore’s dollar, helping to pare import costs. The currency fell 0.1 percent as of 2:59 p.m. local time today, while the benchmark Jakarta Composite Index (JCI) of stocks slid 2 percent, according to data compiled by Bloomberg.
Stock Slide
The gauge has slumped 10 percent this month, compared with a 13.3 percent tumble in the MSCI AC Asia-Pacific (MXAP) index over the same period. The threat of the European crisis engulfing Italy and Spain, and Standard & Poor’s decision on Aug. 5 to cut its U.S. credit rating to AA+ from AAA, hurt investor sentiment around the world. Speculation is growing the Federal Reserve may do more to restore confidence.
The impact of the global financial turmoil on Indonesia’s markets is “limited,” Bank Indonesia said today. The nation’s economy may expand 6.6 percent this year, supported by exports, domestic consumption and investment, it said.
Southeast Asia’s largest economy relies on consumption more than some of its neighbors, making it less vulnerable to swings in global demand for Asian exports.
Neighboring Malaysia and the Philippines have also left borrowing costs unchanged in recent weeks, opting instead to ask banks to set aside more cash as reserves. In contrast, China, India and Thailand raised rates in July.
Consumption Buffer
The $707 Indonesian billion economy, the eighth-largest among emerging markets, has expanded twice as fast as global output since 2008, aided by a boom in consumer spending. That’s boosted earnings at companies from Jakarta-based PT Indofood Sukses Makmur to PT Gudang Garam, a Kediri-based cigarette maker.
Global uncertainties won’t hurt expansion as the Indonesian economy should “remain buffered given its domestic orientation,” said Wellian Wiranto, a Singapore-based economist at HSBC Holdings Plc.
Gross domestic product increased 6.49 percent in the three months through June from a year earlier. Growth may accelerate to 6.6 percent in the third quarter, Bank Indonesia said today.
Consumer prices rose 4.61 percent in July from a year earlier, easing from a 5.54 percent pace in June. The central bank predicts inflation will be 4 percent to 6 percent this year and 3.5 percent to 5.5 percent in 2012.
President Susilo Bambang Yudhoyono’s government has held off from removing fuel subsidies this year and is importing rice to cool domestic prices as the world’s most populous Muslim nation observes the fasting month of Ramadan.
Indonesia is one step away from its first investment-grade credit rating in more than a decade as Yudhoyono targets growth of as much as 6.6 percent on average through the remainder of his term ending in 2014. He plans to double spending on roads, ports and airports to $140 billion by then after inadequate infrastructure hampered growth.
To contact the reporters on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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