Indonesia Holds Rate as Price Pressures Reduce Easing Scope

Indonesia kept its benchmark interest rate unchanged for a 12th meeting as a depreciating currency and inflationary pressures reduce scope for an addition of monetary stimulus to spur a slowing economy.

Bank Indonesia Governor Darmin Nasution and his board held the reference rate at a record-low 5.75 percent, the central bank said in Jakarta today. The decision was predicted by all 17 economists surveyed by Bloomberg News.

Southeast Asia’s largest economy is facing rising price pressures from higher power tariffs, an increase in minimum wages and as a weakening rupiah raises the cost of imported goods. At the same time, the economy grew at the slowest pace in more than two years last quarter as an export slump countered gains in domestic consumption.

“The current rate is friendly for capital markets, bonds and to support growth,” Branko Windoe, head of treasury at PT Bank Central Asia, said after the decision. “By keeping the rate, Indonesian 10-year bonds are more attractive compared to other countries. Indonesia remains an investment destination and it will have a positive impact on the rupiah.”

The government’s 11 percent notes due October 2014 advanced, pushing the yield down by three basis points, or 0.03 percentage point, to 4.40 percent as of 3:24 p.m. in Jakarta, prices from the Inter Dealer Market Association show. That was the biggest drop since Feb. 6.

Capital Inflows

The rupiah weakened 0.3 percent to 9,644 per dollar, after reaching a two-month high of 9,603 yesterday, prices from local banks compiled by Bloomberg show. In the past year, the currency is the worst performer after the yen and the Indian rupee among 11 most-active Asian currencies tracked by Bloomberg as the nation’s current account remained in deficit.

The central bank has stepped up intervention to support the rupiah and narrow the gap between local and overseas prices, Hendar, executive director for monetary policy, said in a Jan. 28 interview. The central bank may take action on its benchmark rate if the currency’s depreciation causes inflation to accelerate, Deputy Governor Hartadi Sarwono said last month.

Policy makers have signaled the need to boost short-term borrowing costs to spur capital inflows. Bank Indonesia raised the rate it pays lenders on overnight deposits in August to 4 percent from 3.75 percent.

The central bank may “gradually” increase the deposit facility rate to help reduce volatility in the currency that may hurt investor confidence, Sarwono said on Nov. 9.

Domestic Demand

Gross domestic product increased 6.11 percent in the three months through December from a year earlier, after a revised 6.16 percent gain in the third quarter, the statistics bureau said Feb. 5. The economy grew 6.2 percent in 2012.

The economy may expand by 6.2 percent in the first quarter from a year earlier and by 6.3 percent to 6.8 percent for the full year, buoyed by increased domestic demand and potential spending ahead of general elections.

Bank Indonesia expects inflation to remain in a range of 3.5 percent to 5.5 percent in 2013 and 2014, it said today. Risks to inflation include the potential for further flooding, which could disrupt the production and distribution of food, according to the statement

Consumer prices climbed 4.57 percent in January from a year earlier, after a 4.3 percent gain in December, as floods submerged areas of Jakarta and other provinces and increased food prices, the statistics bureau said Feb. 1.

The current account deficit, at about 2.7 percent of gross domestic product last year, is near the government’s threshold of 3 percent of GDP, Deputy Finance Minister Mahendra Siregar said last week.

The current account deficit is expected to improve in the first quarter as exports recover in line with stronger growth in the economies of trading partners including China and the U.S., Bank Indonesia said in its statement. The central bank will continue to strengthen its policy mix aimed at bringing the current account deficit to a more sustainable level, it said.

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