Indonesia Holds Key Rate as Fuel Policy Plan Adds Inflation Risk

Indonesia kept interest rates unchanged for a 15th consecutive meeting as the threat of inflation from planned fuel-price increases outweighs the risk of slowing growth.

Bank Indonesia Governor Darmin Nasution and his board held the reference rate at a record-low 5.75 percent, the central bank said in Jakarta today. The decision was predicted by all 21 economists surveyed by Bloomberg News. This is Nasution’s last rate meeting before he hands over to former Finance Minister Agus Martowardojo later this month.

Indonesia joins Southeast Asian neighbor Malaysia in holding borrowing costs steady even as other central banks in the region from Australia to India cut rates this month to bolster growth. The government plans to trim fuel subsidies to ease the strain on state finances, which economists including Chua Hak Bin of Bank of America Corp. predict may cause inflation to accelerate to as much as 8 percent.

“Inflation remains elevated and outside the BI target range,” Chua said before the rate decision. With slowing GDP growth, “that complicates decision-making for Bank Indonesia as it has to trade- off between the two objectives,” he said.

The rupiah was little changed at 9,739 per dollar as of 3:03 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. The currency is the worst performing currency in Asia after the yen in the past year.

Indonesia’s economy grew 6.02 percent in the first three months of 2013 from a year earlier, after expanding 6.11 percent the previous quarter, the statistics department said last week. The government this month lowered its GDP target for 2013 to about 6.2 percent to 6.3 percent from 6.8 percent previously.

Exports Drop

Overseas shipments fell the most in seven months in March, while imports dropped the most since 2009. The country is the biggest producer of palm oil, and its commodity exports include coal, rubber, tin and cocoa.

Acting Finance Minister Hatta Rajasa said yesterday he has signed a revised state budget that will be presented to Parliament. The government has said the new budget will contain details of a compensation plan to offset the impact of higher fuel prices on the poor. It intends to raise subsidized gasoline prices to 6,500 rupiah ($0.67) a liter, and subsidized diesel to 5,500 rupiah per liter, Planning Minister Armida Alisjahbana said yesterday.

The central bank won’t resist raising rates if needed, Assistant Governor Hendar said May 8. Consumer prices rose 5.57 percent in April from a year earlier, slowing from a 22-month high of 5.9 percent in March.

The Bank of Korea cut interest rates last week, following the lead of policy makers in Australia, Europe and India this month. Malaysia kept rates unchanged on May 9.

To contact the reporter 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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