Bank Indonesia held its key interest rate for a seventh straight meeting, citing risks from the global economy as growth slows.
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 20 economists surveyed by Bloomberg News. It also kept the deposit facility rate unchanged at 5.75 percent.
Indonesia’s growth has been restrained by interest-rate increases last year that curbed investment and a mineral-ore export ban that hurt the mining industry. Southeast Asia’s largest economy is also struggling to narrow a current-account deficit driven by oil product imports, prompting both candidates running for president next month to pledge fuel-subsidy cuts.
“We expect the current account to remain contained as the slowdown in the economy continues to drag on imports,” Gareth Leather, Asia economist at Capital Economics Ltd., said in a note after the decision. “BI’s focus is instead likely to shift towards supporting growth.”
The benchmark Jakarta Composite Index of stocks fell 0.8 percent at the close, trimming earlier losses after the rate decision. The rupiah rose 0.2 percent to 11,788 per dollar as of 5:17 p.m. local time, prices from local banks show.
The rupiah, which slid the most in Asia last year after the current-account deficit reached a record during the second quarter, has weakened after April elections resulted in a fragmented parliament that may make it harder for the next government to achieve lasting improvements to the trade balance.
Bank Indonesia said it kept the key rate unchanged because of risks from the global economy, and also to try to narrow a current-account gap that it estimates will be slightly less than 3 percent of gross domestic product in 2014. The deficit may double from April through June compared with the previous quarter, Martowardojo said this month after a surprise trade deficit in April.
“We remain in a period of elevated imports,” Helmi Arman, an economist at Citigroup Inc. in Jakarta, said before the decision. “It is too soon to expect BI to respond with any rate changes this month.”
Standard & Poor’s, the only one of the three top rating companies to place the nation’s bonds at junk level, said in April the country risks market deterioration because of the current-account deficit trend and external debts.
Higher interest rates, declining exports and slowing investment cut GDP growth to 5.21 percent in the first quarter from a year earlier, the weakest pace in more than four years.
The economy may expand 5.3 percent this quarter on better exports, Bank Indonesia said today, predicting the trade balance will improve. Full-year growth may be 5.1 percent to 5.5 percent, while inflation will probably be 3.5 percent to 5.5 percent this year and 3 percent to 5 percent next, it said. Bank loans grew 18.5 percent as of April from a year earlier.
Bank Indonesia will likely remain on hold until the fourth quarter of this year, when it may lift its rate, according to Australia & New Zealand Banking Group Ltd. economists, Weiwen Ng and Glenn Maguire.
Household consumption will stay resilient on improving incomes and ahead of next month’s presidential election, even as investment and exports may ease due to slowing coal sales and the implementation of the mineral-ore ban, Bank Indonesia said. Religious festivals, higher power tariffs and the El Nino weather impact on crops will raise inflation risks, it said.
Joko Widodo and Prabowo Subianto, who will contest a July 9 election for president, have both said they aim to gradually remove fuel subsidies, which drive demand for imports and take up state funds that could be used for infrastructure and health care.
“Should the recent strength in import demand accelerate, the trade balance could deteriorate,” said the ANZ economists. “Coupled with a firmer underlying pulse to inflation with the risk of much-needed subsidy rationalisation in the second half possibly compounding second-round effects from sharply higher electricity prices, odds of a tightening bias have risen.”
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