Indonesia Holds Key Rate as Asia Monetary Easing Subsides
Indonesia kept its benchmark interest rate unchanged for a seventh straight meeting as accelerating economic growth and inflation reduced the scope for monetary easing to counter an export slump.
Bank Indonesia Governor Darmin Nasution and his board held the reference rate at a record-low 5.75 percent, the central bank said in a statement in Jakarta today. The decision was predicted by all 22 economists surveyed by Bloomberg News.
Indonesia joins South Korea and Malaysia in preserving firepower this month as the European Central Bank backs unlimited purchases of government debt to resolve the region’s crisis and economists predict the U.S. will announce a third round of quantitative easing. A declining rupiah and rising food costs are adding to price pressures in Southeast Asia’s largest economy, where growth has exceeded 6 percent since 2010.
“It isn’t useful to adjust monetary policy in these current conditions as markets are still waiting for quantitative easing in the U.S. or stimulus in China,” said Branko Windoe, head of treasury at PT Bank Central Asia in Jakarta. “Inflation remains manageable and the economy robust; there’s no pressure for the central bank to adjust its reference rate this month.”
The rupiah pared its loss to 0.2 percent, trading at 9,587 rupiah per dollar as of 4:14 p.m. in Jakarta after reaching the lowest level since May 31 earlier, according to prices from local banks compiled by Bloomberg. It has dropped more than 5 percent this year, the worst performer among 11 Asian currencies tracked by Bloomberg.
The policy rate is still consistent with Indonesia’s low and manageable inflationary pressure, the central bank said today. The monetary authority will strengthen coordination with the government to manage domestic demand and improve the current-account position in line with efforts to maintain macroeconomic stability and sustainable growth, it said.
Bank Indonesia said the current-account deficit may narrow in the third quarter even as pressure persists from the worsening global economy. The central bank will evaluate the impact of policies that have been taken and will implement further measures if needed, it said.
The Bank of Korea unexpectedly held borrowing costs today, while New Zealand signaled an 18-month pause in record-low interest rates may last through mid-2013 to help bolster an economy buffeted by weaker global growth. Malaysia and Thailand left their key rates unchanged last week, and the Philippine central bank did the same today.
“In contrast to most of the rest of the region where we are expecting further rate cuts by the end of the year, monetary policy in Indonesia is likely to remain on hold until end- 2012,” said Gareth Leather, an economist at Capital Economics Ltd. in London. “Although weak global demand will take some of the steam out of the economy, as one of the region’s least trade-dependent economies Indonesia is relatively well-placed to withstand the impact of a global downturn.”
Inflation is likely to accelerate “sharply” in the coming months due to rebounding food prices, strong credit growth, buoyant domestic demand and loose monetary policy, he said in a note. The worsening current account and weak rupiah are also reasons for a rate increase, he said.
Indonesia’s gross domestic product rose 6.37 percent in the three months through June from a year earlier, after climbing 6.32 percent in the first quarter. The country’s growth is among the fastest in the Group of 20 nations, as President Susilo Bambang Yudhoyono boosts investment more than a decade after the Asian financial crisis that forced the nation to seek an International Monetary Fund bailout.
The economy is performing in line with its capacity, and growth in the second quarter was supported by consumption and investment, the central bank said. Exports may improve as some major trading partners recover amid the risk of a global economic slowdown, it said. Bank lending rose 25.2 percent in July from a year earlier.
Yudhoyono has pledged to build more roads, ports and airports to achieve average growth of 6.6 percent by the end of 2014. In July, the central bank lowered its GDP growth forecast to about 6.1 percent to 6.5 percent this year, from a previous estimate of as much as 6.7 percent. Indonesia’s expansion may be about 6.3 percent to 6.7 percent in 2013, it said.
Inflation unexpectedly accelerated in August on rising food costs, as consumer prices rose 4.58 percent from a year earlier. The central bank has an inflation target of 3.5 percent to 5.5 percent in 2012 and 2013. The pressure on core inflation should be temporary, it said today.
Bank Indonesia is trying to narrow a current-account deficit that reached $6.9 billion in the three months through June, from a $3.2 billion shortfall the previous quarter.
Indonesia’s balance of payment will probably improve in the third quarter, the central bank said, citing a better trade balance in July. The current-account deficit can be offset by an increasing surplus in the financial and capital account driven mainly by foreign direct investments, it said.
The central bank has also intervened repeatedly to support the rupiah this year as the faltering global economy prompted investors to reduce holdings of emerging-market assets. The nation’s foreign-exchange reserves dropped to $109 billion at the end of August from a record-high of $124.6 billion on Aug. 31, 2011, central bank data show.
While policy makers have left the benchmark rate unchanged since a cut in February, the central bank has raised the lower end of its interest-rate corridor, known as the deposit facility rate. It increased the rate it pays on interbank deposits to 4 percent last month from 3.75 percent.
“What will matter increasingly for the markets is what happens to short-term rates and the deposit facility rate,” said Aninda Mitra, an economist at Australia & New Zealand Banking Group Ltd. who is based in Singapore. “We have been calling for some time now for much less foreign-exchange intervention, to preserve foreign reserves, and higher short- term rates which are more realistically aligned with the Bank Indonesia reference rate.”
Pressure on the rupiah has come from the fragile global economic recovery and instability in financial markets, as well as declining exports amid strong imports, Bank Indonesia said. The central bank will closely monitor the foreign exchange market to keep the rupiah in line with its fundamentals, it said.
The central bank will “continue to attain external balance” gradually, and focus on inflation management, strengthening its policy mix and efforts to manage domestic demand, it said.
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