Indonesia Holds Rate With Risks to Rupiah Rising Before Fed

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Indonesia’s central bank kept its main interest rate unchanged for a fifth month, refraining from monetary easing that could further weaken one of Asia’s worst-performing currencies.

Governor Agus Martowardojo and his board held the reference rate at 7.5 percent, Bank Indonesia said in Jakarta on Tuesday, an outcome predicted by all 20 economists surveyed by Bloomberg News. The authority also maintained the rate it pays lenders on overnight deposits, commonly referred to as the Fasbi, at 5.5 percent.

The decision reflects the challenge for Indonesian policy makers grappling with both growth and currency risks, as stock market ructions and a slowing economy in China threaten exports while the impending U.S. rate increase puts pressure on the rupiah. Inflation above 7 percent and a current-account deficit also make cutting rates difficult in an economy growing at the slowest pace since 2009.

“Although domestic growth fundamentals suggest BI could cut rates, inflation remains well above their target, and financial market volatility suggest keeping rates on hold is prudent,” Australia & New Zealand Banking Group Ltd. economists Daniel Wilson and Glenn Maguire said in a note. “We still expect BI to reassess their policy position once the Fed begins hiking rates, and disinflation gathers steam through Q4 this year.”

The rupiah fell 0.3 percent to 13,338 a dollar as of 4:33 p.m. in Jakarta. The benchmark stock index closed up 0.2 percent.

Inflation Target

The rate decision is in line with the central bank’s efforts to keep inflation within its target of 3 percent to 5 percent this year and next, the authority said in a statement. Bank Indonesia said it expects to achieve that target in 2015.

Growth in the second quarter will be limited as household consumption is still weak and government spending is low, the central bank said, predicting an acceleration in the three months through September. Net non-performing loans are still low at about 1.4 percent of total lending, and credit growth was 10.4 percent year-on-year as of May, little changed from the previous month, it said.

Concern that higher U.S. rates anticipated later this year will spur outflows from emerging markets have seen the rupiah depreciate by about 7 percent against the dollar this year, the worst after the Malaysian ringgit among major Asian currencies tracked by Bloomberg.

The rupiah’s decline was largely influenced by “external factors” such as the Greek fiscal crisis and the Fed’s policy direction, the central bank said. Dividend and debt payments in the second quarter also weighed on the currency, it said.

“External factors are basically causing uncertainty,” David Sumual, the Jakarta-based chief economist at PT Bank Central Asia, said before the policy decision. “It’s better to just hold things for the time being, especially with inflationary pressures still there.”

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