Indonesia Holds Benchmark Rate as Inflation Pressure Eases

Indonesia’s central bank kept its key interest rate unchanged for a fifth straight meeting, extending a pause in monetary tightening as inflation slowed.

Bank Indonesia Governor Agus Martowardojo and his board maintained the reference rate at 7.5 percent, the central bank said in Jakarta today, a decision predicted by all 21 economists surveyed by Bloomberg News. It also kept the deposit facility rate unchanged at 5.75 percent.

Martowardojo embarked on the country’s most aggressive rate-tightening cycle in eight years within a month of taking the helm last May to shore up the rupiah, rein in a current-account deficit and damp price pressures. Inflation in Southeast Asia’s largest economy eased to a nine-month low in March.

“Falling inflation and fading external vulnerabilities suggest further rate hikes are no longer warranted,” Krystal Tan, a Singapore-based economist at Capital Economics Ltd., said in an e-mail after the decision. They have also helped ease currency risks, she said.

The rupiah rose 0.1 percent to 11,290 per dollar as of 3:56 p.m. in Jakarta, prices from local banks show. It climbed 7.1 percent last quarter, the most since the three months through June 2009, and is the biggest gainer this year among 24 emerging-market currencies tracked by Bloomberg. The benchmark stock index closed little changed.

Current Account

The consumer price index gained 7.32 percent in March from a year earlier, slowing from 7.75 percent in February. The nation posted a trade surplus in February of $785 million, above economists’ estimates for a $300 million surplus.

The improved trade picture has led foreign funds to pour $2.6 billion into Indonesia’s stock market as of yesterday, according to data compiled by Bloomberg.

“Provided inflation falls back as expected and there is no renewed pressure on the rupiah, the next move in rates is likely to be downwards, but probably not before the end of the year,” Tan said. The next policy meeting is scheduled for May 8.

President Susilo Bambang Yudhoyono’s administration is targeting a current-account deficit of between 2 percent and 2.5 percent of gross domestic product, after the broadest measure of trade widened to a record 4.4 percent of GDP in the second quarter of last year.

The government needs to continue to slow down the economy until the current-account target is achieved, Finance Minister Chatib Basri said in February. Bank Indonesia last month cut its 2014 economic growth forecast to 5.5 percent to 5.9 percent, even as domestic consumption stays robust due to spending on elections that start tomorrow with a parliamentary vote.

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net Neil Chatterjee, Rina Chandran

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