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Indonesia Holds Key Rate as Current-Account Deficit Persists

Indonesia kept its key interest rate unchanged for a ninth straight meeting, as a wider current-account deficit limits the scope for the central bank to ease borrowing costs to support a slowing economy.

Bank Indonesia 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 28 economists surveyed by Bloomberg News.

The current-account deficit was $9.1 billion, or 4.27 percent of gross domestic product in the three months through June 30, more than double the previous quarter, Martowardojo said today. Southeast Asia’s largest economy expanded 5.12 percent in the second quarter from a year earlier, the slowest pace since 2009.

“The current-account deficit remains a concern, further fuel price hikes are in the policy outcome horizon, and developed-market rate increases are also nearing,” Daniel Wilson, a Singapore-based economist at Australia & New Zealand Banking Group Ltd., said before the announcement. Bank Indonesia will “favor policy stability,” he said.

The rupiah erased earlier gains and traded unchanged at 11,691 against the dollar as of 2:32 p.m. in Jakarta, prices from local banks showed. Concerns over the current account led the currency to drop 21 percent last year, the most in Asia. The Jakarta Composite Index extended a fall to drop 0.6 percent.

‘Very’ High

A widening current-account shortfall is the main risk for Indonesia’s economy, Martowardojo said on July 23, with the central bank today forecasting a deficit of around 3.2 percent of GDP for 2014.

The “very high level” of the current-account deficit in the second quarter casts doubt over the ability of the rupiah to rebound further in the medium term, Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, said today.

The current-account deficit, which hit a record in the second quarter last year, widened due to seasonal factors such as an oil trade gap and foreign debt payments, Martowardojo said. Senior Deputy Governor Mirza Adityaswara said the gap would have been worse without monetary policy tightening by the central bank, which lifted interest rates by 1.75 percentage points last year after Martowardojo became governor.

A weaker rupiah is hurting some businesses, and an appreciation in the currency could help strengthen the economy, Vice Finance Minister Bambang Brodjonegoro said in an interview this week. President-elect Joko Widodo, who ran on a platform of concern for common people, won last month’s election, giving him a mandate to govern from October until 2019.

Bank Indonesia also kept the deposit facility rate unchanged at 5.75 percent, and stuck to its previous forecasts for economic growth of 5.1 percent to 5.5 percent his year, with inflation at 3.5 percent to 5.5 percent.

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