Indonesia Holds Key Rate to Shield Rupiah at Three-Year Low

Indonesia’s central bank held its benchmark rate unchanged for a 10th straight meeting as its currency near a three-year low reduces scope for monetary easing.

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 21 economists surveyed by Bloomberg News.

The rupiah has dropped more than 6.5 percent against the dollar in the past year as rising imports and declining exports led to a widening current-account deficit and $1.5 billion trade gap in October. The central bank has refrained from joining neighbors from Thailand to the Philippines in extending rate cuts since a February reduction to support the currency and as growth exceeding 6 percent eased the need for stimulus.

“The rupiah may weaken sharply beyond manageable levels if Bank Indonesia lowered the rate, even if it has room due to stable inflation,” said Leo Rinaldy, an economist at PT Mandiri Sekuritas in Jakarta. “Bank Indonesia’s stance will still be accommodative to economic growth, but if a worsening current-account deficit results in a sharp weakening in the exchange rate,” policy makers may raise the deposit facility rate next year, he said.

The rupiah dropped 0.4 percent to 9,665 per dollar as of 5:22 p.m. in Jakarta. The Jakarta Composite Index rose 0.4 percent.

Fasbi Rate

Policy makers have signaled the need to boost short-term borrowing costs to support the currency. Bank Indonesia increased the rate it pays lenders on overnight deposits, known as the Fasbi, in August to 4 percent from 3.75 percent.

The central bank may “gradually” raise the Fasbi rate to help reduce volatility in the currency that may hurt investor confidence, Deputy Governor Hartadi Sarwono said in a Nov. 9 interview in Jakarta.

Bank Indonesia didn’t see the need to increase the Fasbi rate today as the rupiah is stable and inflation remains manageable, Perry Warjiyo, executive director for economic research and monetary policy at the central bank, said on a conference call today.

There’s no pressure to adjust the main reference rate in the next three to six months, because it is still “consistent” with the inflation target, Sarwono said last month.

Ongoing Weakness

“The ongoing weakness in the rupiah will likely deter any near-term rate cuts,” Fred Gibson, an associate economist at Moody’s Analytics in Sydney, said before the decision. “Monetary policy remains in a sweet spot as the economy continues to expand around trend, while inflation remains within the central bank’s” target, he said.

Consumer price gains slowed in November, as the index climbed 4.32 percent from a year earlier, after a 4.61 percent gain in October, the statistics bureau said last week. Consumer prices may rise 4.2 percent to 4.3 percent this year, Bank Indonesia said today.

While the central bank maintained its inflation target rate of about 3.5 percent to 5.5 percent for next year, price pressures may escalate in Southeast Asia’s biggest economy amid a planned increase in electricity tariffs and a possible reduction in fuel subsidies. Consumer prices may rise 4.9 percent in 2013, Warjiyo said.

Wage Pressures

“A hike in the BI reference rate may become necessary in the second quarter of 2013 as wage pressures rise, and government regulated electricity tariffs are adjusted upward,” said Aninda Mitra, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “These hikes are designed to limit the subsidy bill, and could be accompanied by increases in train ticket prices, as well as subsidized fuel prices.”

Domestic consumption and rising investment has countered an export slump. The economy grew 6.17 percent in the three months ended Sept. 30 from a year earlier. The expansion may be 6.2 percent this quarter and 6.3 percent for 2012, the central bank said today. Growth may accelerate to 6.5 percent next year, Warjiyo said.

Indonesia’s October trade deficit may have been the biggest on record, the statistics bureau said Dec. 3. It was caused by a surge in imports due to plane and oil purchases, it said. Exports have dropped for seven consecutive months, the longest string of losses since 2009.

The country’s current-account shortfall this year may be 2.4 percent of its gross domestic product, the central bank said today, wider than the 2.2 percent deficit predicted by Nasution last week. The gap would be the largest since 1996. Indonesia has recorded a current-account deficit for the past four quarters.

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