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Indonesia Holds Key Rate a Sixth Month as Growth Accelerates

Indonesia kept its benchmark interest rate unchanged for a sixth month as faster economic expansion and persistent inflationary pressure reduced the central bank’s scope to resume monetary easing. The rupiah strengthened.

Bank Indonesia Governor Darmin Nasution and his board kept 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 but one of 26 economists surveyed by Bloomberg News. One expected a 0.25 percentage-point reduction.

Growth in Southeast Asia’s largest economy unexpectedly accelerated last quarter as rising investment helped the nation withstand Europe’s sovereign-debt crisis, which has hurt more export-dependent neighbors from Singapore to Taiwan. Indonesia has refrained from adding to a February rate cut even as policy makers from China to the Philippines lowered borrowing costs, as its currency weakened and inflation held above 4 percent.

“The decision today is appropriate as inflation risks will increase due to uncertainty in commodity prices,” said Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta. “Cutting rates will be bad for the currency, triggering capital outflows in the short term. Indonesia needs inflows to offset the current-account deficit.”

The rupiah snapped two days of declines, rising 0.2 percent to 9,472 rupiah per dollar as of 5:40 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. It has dropped in each of the last six months, its longest losing streak since 1998, and is the worst performer this year among the 11 most-traded Asian currencies.

External Pressure

The central bank said it is concerned about the current-account deficit due to slowing exports and rising imports. It will seek to maintain the external balance to bring the shortfall back to a more sustainable level, and ensure rupiah stability in line with fundamentals, it said in today’s statement. Bank Indonesia will strengthen coordination with the government to manage domestic demand, and this may ease pressure on the balance of payments in the second half, it said.

Southeast Asia’s largest economy posted a June trade deficit of $1.32 billion, the widest in at least five years. Exports fell 16.4 percent in June from a year earlier, while imports rose 10.7 percent. Indonesia may report its first full-year current-account deficit since the Asian financial crisis in 1997-98, according to DBS Group Holdings Ltd.

Food Prices

The benchmark rate is still consistent with the central bank’s inflation target of 3.5 percent to 5.5 percent in 2012 and 2013, Bank Indonesia said today. Consumer prices rose 4.56 percent in July from a year earlier, the fastest pace in 10 months, as food costs rose.

Price pressures may remain elevated as the country with the world’s largest Muslim population observes the fasting period of Ramadan and the Eid al-Fitr festival that marks its end. Food prices may pose a risk to inflation, the central bank said.

Indonesia’s gross domestic product rose 6.37 percent in the three months through June from a year earlier, more than a revised 6.32 percent gain for the first quarter. The country’s growth is the fastest among the Group of 20 nations after China, 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 central bank forecasts economic growth of 6.1 percent to 6.5 percent in 2012 and 6.3 percent to 6.7 percent in 2013, it said today. Expansion will be supported by consumption and investment, it said.

Rupiah Pressured

“There’s no urgent need to lower interest rates this month,” David Sumual, an economist at PT Bank Central Asia in Jakarta, said before the decision. “Cutting rates can trigger asset bubbles in certain sectors, and the current rate is adequate to support the economy amid the global turmoil that won’t be resolved in the short term.”

PT Bank Mandiri, Indonesia’s biggest bank by assets, said last month first-half profit rose from a year earlier as lending increased. Loan growth in Indonesia was 25.8 percent as of the end of June, the central bank said today.

The European crisis, a fragile recovery in the U.S., and declining exports have put pressure on the rupiah, the monetary authority said. Bank Indonesia will maintain balance in the foreign-exchange market to keep the rupiah’s movement in line with its fundamentals, it said.

The current-account deficit is expected to decline in the second half, Bank Indonesia said, supported by a possible recovery in the global economy and commodity prices as well as policy responses from the central bank and government.

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