Indonesia Extends Pause in Rate Cuts as Price Risk Persists

Indonesia Extends Pause in Rate Cuts as Inflation Risk Persists
Women stand in front of the Bank Indonesia building in Jakarta, Indonesia. Photographer: Dimas Ardian/Bloomberg

Indonesia’s central bank left its benchmark interest rate unchanged for a second month as inflation risks persist even after the government was forced to postpone an increase in subsidized fuel prices.

Bank Indonesia kept the reference rate at 5.75 percent, Governor Darmin Nasution said at a press conference in Jakarta today. The decision was predicted by all 21 economists in a Bloomberg News survey. Policy makers cut the rate in February.

Inflation in Southeast Asia’s largest economy accelerated in March for the first time in seven months, and lawmakers have rejected an immediate fuel-cost increase while giving the government power to act if Indonesian crude exceeds the budget assumption of $105 a barrel by 15 percent over six months. The central bank said today it will take steps to counter any temporary impact on price pressures.

“We expect Bank Indonesia to hold the policy rate at 5.75 percent for the time being, given the uncertainty over the fuel price hike and inflation,” Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore, said in a note. “Monetary tightening via reserve requirement hikes and narrowing of the interest-rate corridor, rather than via the BI policy rate, is likely the preferred first course of action.”

Fuel Price Impact

Inflation may accelerate to about 6.6 percent if the government raises subsidized fuel prices this year, Nasution said. The impact would be temporary, and to contain the short-term inflationary pressure policy will focus on strengthening monetary operations and curbing excess funds, he said.

The nation’s currency was little changed at 9,182 a dollar in Jakarta today. The benchmark Jakarta Composite index of stocks gained 0.2 percent. The rupiah has weakened more than 1 percent this year, making it Asia’s worst performer after the yen.

The central bank has moved to contain consumer lending and minimize credit risks using measures other than the benchmark rate. The authority said last month it will require banks to ask for down payments for new home and vehicle loans to avoid a bubble in property prices and slow vehicle imports.

The minimum down payment for mortgages will be 30 percent, while those for motorcycle loans will be 25 percent, Bank Indonesia said. For “productive” vehicles such as buses used for public transportation, the amount is 20 percent, and the minimum down payment for cars will be 30 percent, it said. The new rules will be effective June 15.

Cautious Tone

“The central bank continues to lean to a more cautious tone by stating that it will watch rising inflationary pressures going forward,” said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore. “It only means that BI will not hesitate to unwind some of its recent monetary easing, if the government were to implement the fuel price hike sometime this year.”

Asian nations can refrain from further stimulus because growth will remain robust and spikes in energy costs can revive price risks, the Asian Development Bank said yesterday. Still, it said Europe’s debt woes “present the greatest risk to the global outlook,” and policy makers should prepare for the possibility of an extended period of weak European demand.

Sumatra Quake

“Global financial markets have stabilized as European sovereign debt tensions ease, while the domestic economy remains resilient thanks to robust investment and household spending,” said Fred Gibson, an associate economist at Moody’s Analytics in Sydney. “We believe Bank Indonesia will keep rates on hold in the coming months, with a bias toward easing to safeguard against any turbulence in the global economy.”

Yesterday’s 8.6-magnitude earthquake off Sumatra, which struck in the late afternoon and triggered widespread tsunami warnings, has had “no discernable impact on growth,” Gibson said, predicting Indonesia’s economy to grow 6.4 percent in 2012.

Gross domestic product growth may reach 6.3 percent to 6.7 percent this year and accelerate to as much as 6.8 percent in 2013, the central bank said today. Expansion in the second quarter may be 6.4 percent, compared with an estimated 6.5 percent the previous three months, it said. Inflation next year is targeted at 3.5 percent to 5.5 percent, Nasution said.

Indonesian consumer prices rose 3.97 percent last month from a year earlier, compared with a 3.56 percent gain in February. Core inflation eased to 4.25 percent, compared with a previously reported 4.31 percent pace for February.

Policy Dilemma

Rising commodity prices, especially oil, have increased inflationary pressure that can lead to tight monetary policy in emerging markets, Nasution said today. With the risks to the global economy and higher prices, capital flows in emerging markets may remain volatile, he said.

“Decision-making on interest rates has become a dilemma for emerging economies, as policy makers need to support growth, and on the other hand there’s inflationary pressure due to high oil prices,” Destry Damayanti, Jakarta-based chief economist at PT Bank Mandiri, said before the decision.

Bank Indonesia had lowered rates by one percentage point since early October, boosting profits at commercial lenders such as PT Bank Central Asia, the country’s largest lender by market value.

“Loan growth was supported by a favorable economic environment and low interest rate,” said Jahja Setiaatmadja, president director of Bank Central Asia.

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