Indonesia Holds Main Rate as Inflation Pressures Re-Emerge

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Indonesia’s central bank kept its main interest rate unchanged for a second month, refraining from easing policy as inflationary pressures reappear.

Governor Agus Martowardojo and his board kept the reference rate at 7.5 percent, Bank Indonesia said in Jakarta on Tuesday. Twenty out of 21 economists surveyed by Bloomberg News had predicted the decision, while one forecast a cut. The authority said it plans macroprudential policies that are more accommodative, including incentives for bank lending.

Bank Indonesia joins peers in Singapore, Australia and India in pausing after easing policy earlier in 2015, as the U.S. Federal Reserve considers raising rates this year. Limiting scope to cut borrowing costs in Southeast Asia’s largest economy are a current-account deficit that has hurt the rupiah, and a pick up in inflation in March that could accelerate as the Ramadan festive season starts in mid-June.

“Inflation risks are on the upside ahead of Ramadan,” Bharti Bhargava, a Singapore-based regional economist at advisory firm Forecast, said before the decision. “The external situation with the U.S. talking about hiking its monetary policy is also impacting this decision.”

The rupiah was little changed at 12,982 a dollar as of 4:54 p.m. in Jakarta, according to prices from local banks. The currency has lost more than 4 percent against the dollar this year to be the region’s worst performer after the ringgit, according to data compiled by Bloomberg.

Growth Moderating

The central bank held the rate it pays lenders on overnight deposits, known as the Fasbi, at 5.5 percent. The authority also kept the lending facility rate at 8 percent.

“Given recent market moves, a hold in rates was a prudent choice,” Daniel Wilson and Glenn Maguire, economists at Australia & New Zealand Banking Group Ltd., said in a note. “Although we believe the forward-looking macroeconomic landscape provides scope for additional rate cuts later this year, now is not the time to ease monetary policy.”

The central bank said economic growth would improve in the second quarter of 2015 after moderating in the first. It forecast full-year growth at the lower end of its 5.4 percent to 5.8 percent target range.

It will give incentives through loan-to-deposit ratio requirements to banks who quickly meet goals for loans to small and medium enterprises, said Tirta Segara, a spokesman. It also plans to issue a rule broadening the definition of deposits in the loan-to-deposit ratio by including bonds issued by lenders, he said.

Loan growth in February was 12.2 percent year-on-year, below the central bank’s 2015 target of 15 percent to 17 percent, he said. The economy grew 5.01 percent in the fourth quarter of 2014 from a year earlier, the slowest pace in more than five years.

The current-account deficit will be narrower in the first three months of this year than in the final quarter of 2014, Bank Indonesia said in the policy statement.

Related News and Information: Singapore Forgoes Adding Stimulus as Growth Exceeds Forecast To Ease or Not to Ease: Bank

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