Indonesia Holds Rate as Inflation Limits Room to Spur Growth

Indonesia kept interest rates unchanged for a 13th consecutive meeting as accelerating inflation reduced scope for the central bank to lower borrowing costs and support slowing economic growth.

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 21 economists surveyed by Bloomberg News.

Higher power tariffs, an increase in minimum wages and a weakening rupiah have contributed to inflation pressures in Southeast Asia’s largest economy, limiting room for monetary stimulus. The central bank, which faces a leadership transition when Nasution’s term ends in May, is also grappling with a current-account deficit and an export slump.

“As long as there’s no improvement in the current-account deficit and the rupiah remains under pressure, the central bank will be constrained in cutting rates to stimulate the economy,” said Juniman, chief economist at PT Bank Internasional Indonesia in Jakarta. “The new central bank chief will need to balance containing inflation while keeping the expansion robust.”

The rupiah fell 0.1 percent to 9,694 per dollar as of 3:45 p.m. in Jakarta, according to the prices from local banks compiled by Bloomberg. In the past year, the currency is the worst performer in Asia after the yen and the Indian rupee among 11 most active Asian currencies tracked by Bloomberg.

Guard Rupiah

The yield on the government’s 11 percent debt due October 2014 dropped four basis points, or 0.04 percentage point, to 4.27 percent as of 3:04 p.m. in Jakarta, the lowest level since February 2012, prices from the Inter Dealer Market Association show.

Bank Indonesia will guard the rupiah and keep it in line with its fundamentals, the central bank said today. The current-account deficit will probably narrow this quarter, it said.

The central bank needs to remain alert and monitor inflation trends, Deputy Governor Hartadi Sarwono said March 1, after consumer prices rose at the fastest pace in 20 months in February on higher food costs and power tariffs. Policy makers may take action on the benchmark rate if the currency’s depreciation causes inflation to accelerate, Sarwono has said.

Consumer prices climbed 5.31 percent last month from a year earlier, after gaining 4.57 percent in January. Bank Indonesia expects inflation to remain in a range of 3.5 percent to 5.5 percent in 2013 and 2014, it said today.

New Team

Indonesian President Susilo Bambang Yudhoyono has nominated Finance Minister Agus Martowardojo as the next central bank chief. A parliamentary committee agreed this week to put Martowardojo through a fit-and-proper test, after rejecting him as a candidate for the same post in 2008. Nasution’s term ends May 23.

The government will cooperate with Bank Indonesia to manage inflation, Martowardojo said today.

Indonesia’s gross domestic product increased 6.11 percent in the three months through December from a year earlier, the statistics bureau said Feb. 5, compared with 6.16 percent the previous quarter.

The economy may grow 6.2 percent this quarter, the central bank said today, adding that growth in 2013 may be at the lower end of its forecast range of 6.3 percent to 6.8 percent. There are signs of investment moderating since the fourth quarter, Bank Indonesia said.

“We maintain our view that the BI rate will remain unchanged through 2013, given the central bank’s bias to support investment, despite rising inflation risks,” said Prakriti Sofat, a regional economist at Barclays Plc in Singapore.

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 deposit facility may be increased once, by a quarter of a percentage point, by the end of second quarter,” said Helmi Arman, an economist at Citigroup Inc. in Jakarta. “The reference rate will be left unchanged unless the rise in non-core inflation starts to generate second-round effects to core inflation.”

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