Indonesia Holds Key Rate After Tightening Most Since 2005

Indonesia’s central bank kept its key interest rate unchanged after its most aggressive tightening cycle in almost eight years as inflation pressure eased.

Governor Agus Martowardojo and his board held the reference rate at 7.25 percent, Bank Indonesia said in Jakarta today. The decision was predicted by 17 of 18 economists surveyed by Bloomberg News, with one expecting a 25 basis-point increase. It also kept the deposit facility rate unchanged at 5.5 percent.

Consumer-price gains slowed to a three-month low in September, providing policy makers room to assess the impact of 1.5 percentage points of rate increases since early June. The World Bank said last week downside risks to Indonesia’s economic outlook are sizeable, as higher borrowing costs and inflation may have a greater-than-expected effect on domestic demand.

“Inflation has started to stabilize and we think there is only a small risk that it will hit double-digits in the coming months,” said Gundy Cahyadi, an economist at DBS Group Holdings Ltd. in Singapore. “BI is likely to maintain its wait-and-see approach,” he said, adding that the key rate will be held “for the foreseeable future.”

The rupiah fell 0.1 percent to 11,538 per dollar as of 3:21 p.m. in Jakarta, prices compiled by Bloomberg from local banks showed. It weakened 14 percent last quarter in the worst performance since 2008. The benchmark Jakarta Composite Index gained 1.2 percent, while the yield on the government’s 5.625 percent bonds due May 2023 declined three basis points to 8.08 percent, the lowest level since Sept. 25.

Trade Surplus

Inflation in Southeast Asia’s largest economy accelerated to a three-year high in August after President Susilo Bambang Yudhoyono’s administration raised the price of subsidized fuel in June and food costs climbed. Price gains eased to 8.4 percent last month from a year earlier.

Inflation this year is seen at 9 percent to 9.8 percent, Martowardojo told reporters today. The current-account deficit may be 3.4 percent of gross domestic product in 2013, he said.

Indonesia posted a current-account deficit of $9.8 billion in the second quarter, or about 4.4 percent of GDP, the biggest in data compiled by Bloomberg going back to 1989. The shortfall in the third quarter is seen at 3 percent to 4 percent of GDP, Perry Warjiyo, deputy governor at Bank Indonesia, said last week.

The country’s trade balance returned to surplus for the first time in five months in August, following a record deficit in July, data last week showed. The partial shutdown of the U.S. government will affect Indonesia’s exports, Warjiyo said today.

A new “macro-prudential” policy will be unveiled tomorrow, Martowardojo said, without providing details. The measures will aim to deepen the financial markets, Warjiyo said.

Lending Slows

Bank Indonesia cut its 2013 economic growth forecast last month to between 5.5 percent and 5.9 percent, from as much as 6.2 percent earlier, citing surveys that showed slowing household consumption. Indonesian banks’ lending growth is slowing, with the gain in August at 22.2 percent from a year earlier, Martowardojo said today.

The economy probably expanded 5.6 percent in the third quarter from a year earlier, and full-year GDP growth in 2014 may be 5.8 percent to 6.2 percent, Martowardojo said.

The central bank did a $820 million foreign-exchange swap on Oct. 7, part of a series of measures to deepen liquidity and improve hedging tools. Its foreign-exchange reserves rose to $95.7 billion in September, the second monthly gain, data showed. They have fallen from $112.8 billion at the end of last year as the monetary authority intervened to support the currency.

“The increase of official reserves largely reflects Bank Indonesia measures to strengthen policy mix to maintain the exchange rate stability and policy coordination with the government to curb the current account deficit,” Bank Indonesia said in a statement on Oct. 7.

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