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Indonesia Holds Benchmark Rate to Shield Weakening Currency

Oct. 11 (Bloomberg) -- Indonesia held its benchmark interest rate for an eighth month in October as a declining currency reduced scope for the central bank to ease monetary policy even after inflation slowed. The rupiah climbed.

Bank Indonesia Governor Darmin Nasution and his board kept the reference rate at a record-low 5.75 percent, the central bank said in Jakarta today. The decision was predicted by all 23 economists surveyed by Bloomberg News.

Central banks are stepping up efforts to protect the global recovery, with the U.S. expanding monetary easing, the Bank of Japan boosting its asset purchases, and Brazil and South Korea cutting borrowing costs. Indonesian policy makers have avoided adding to a February interest-rate cut to prevent further capital outflows that have weakened the rupiah.

“As inflation is benign, holding the rate is the right choice at this current condition,” Felix Sindhunata, an economist at PT Henan Putihrai in Jakarta, said before the decision. “The BI also wants to guard the rupiah.”

The rupiah rebounded from a four-month low after the decision to advance the most in a month. The currency climbed 0.5 percent to 9,588 per dollar as of 2:49 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. It has lost almost 6 percent this year, the worst performance among Asia’s 11 most-actively traded currencies tracked by Bloomberg.

Domestic Demand

Indonesia’s growth will be supported by local demand and a recovery in exports despite the global uncertainty, Nasution said today. Bank Indonesia maintained its estimates for expansion at 6.1 percent to 6.5 percent this year, and 6.3 percent to 6.7 percent next year, and said the economy may expand 6.3 percent in the third quarter, lower than predicted.

The country’s growth is the fastest among the Group of 20 nations after China, as President Susilo Bambang Yudhoyono boosts spending and invests in ports and railways. Gross domestic product rose 6.37 percent in the three months through June from a year earlier, more than a 6.32 percent gain in the first quarter.

Consumer price gains eased 4.31 percent in September from a year earlier, the slowest pace in six months. While Bank Indonesia today maintained its inflation target at 3.5 percent to 5.5 percent this year and next, a proposed increase in electricity tariffs and a planned reduction in fuel subsidies may revive price pressures in Southeast Asia’s biggest economy.

“Inflation remains a risk next year, as fuel prices will likely be hiked in 2013 to ease pressure from the current account deficit, fuel subsidy bill and weakening rupiah,” said Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore. “We think BI may have to resume tightening in December or January near year to moderate domestic demand.”

Exports Fell

The World Bank lowered its economic growth prediction in developing East Asia, which excludes Japan and India, to 7.2 percent from its forecast in May of 7.6 percent. That is the slowest pace since 2001, according to a report on Oct. 8.

Indonesian exports fell 24.3 percent in August from a year earlier, the worst decline since at least June 2009, according to data compiled by Bloomberg. Imports slid 8 percent for a trade balance of $249 million, the first surplus since March.

The country’s third-quarter current account deficit may be 2.6 percent of gross domestic product and 2.2 percent at the end of the year, the monetary authority said today. Banks’ lending growth as of August was 23.6 percent from a year earlier, and may rise about 23 percent to 25 percent this year, Deputy Governor Halim Alamsyah said at a briefing today.

PT Bank Mandiri, Indonesia’s biggest bank by assets, will keep its credit growth target at 22 percent to 24 percent this year after it rose 27 percent in the first-half from a year earlier, said Finance Director Pahala Mansury.

With inflationary pressure, faster credit growth and declining exports posing risks to the economy, the monetary authority may move to a tightening stance, said Robert Prior-Wandesforde, an economist at Credit Suisse AG in Singapore, who expects 125 basis points of rate increases next year.

“We do not rule out BI pursuing a more aggressive pace, and form, of tightening” if a further blowout in the current-account deficit leads to a sharp sell-off in the rupiah, he said.

To contact the reporters on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net; Hidayat Setiaji in Jakarta at hsetiaji@bloomberg.net

To contact the editor responsible for this story: Shamim Adam in Singapore at sadam2@bloomberg.net

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