Bank Indonesia Holds Key Interest Rate at Highest Since 2009

Indonesia kept its benchmark interest rate unchanged today after raising it to the highest level in more than four years last month, pausing to gauge the impact of recent policy tightening.

Bank Indonesia held the reference rate at 7.5 percent, it said in Jakarta today, as predicted by 16 out of 19 economists surveyed by Bloomberg News. It also kept the deposit facility rate at 5.75 percent and unveiled plans to deepen the rupiah and foreign-exchange market.

Governor Agus Martowardojo has increased the benchmark rate five times since early June as he grapples with a current-account deficit that helped make the rupiah Asia’s worst-performing currency this year. The currency is “undervalued” and the central bank will keep its policy stance tight in 2014 to restore investor confidence, Senior Deputy Governor Mirza Adityaswara said in an interview Dec. 4.

“The currency’s stability has been well-maintained so this supports Bank Indonesia’s decision to hold the rate,” said Priyo Santoso, chief investment officer at PT Mandiri Manajemen Investasi, a unit of the nation’s largest lender by assets. “Bank Indonesia is quite data dependent so their next move will depend on whether the current-account deficit shows continued improvement.”

Record Deficit

The benchmark Jakarta Composite index of stocks pared its decline to 0.6 percent after the decision from as much as 1.3 percent earlier, before closing down 1.4 percent. The rupiah fell 0.3 percent to 12,023 against the dollar as of 4:10 p.m. in Jakarta, prices compiled by Bloomberg from local banks show. It has declined about 20 percent this year, the worst performance among 11 Asian currencies tracked by Bloomberg.

The rupiah’s weakening is in line with regional currencies, the central bank said today, pledging to safeguard the stability of the exchange rate in line with fundamentals. Bank Indonesia will monitor the U.S. Federal Reserve’s plans to cool stimulus and strengthen its policy response, it said.

Southeast Asia’s largest economy had a record current-account deficit of 4.4 percent of gross domestic product in the second quarter and the gap in the broadest measure of trade narrowed to 3.8 percent in the following three months. Bank Indonesia is targeting a shortfall of less than 3 percent in 2014, Adityaswara said in the Dec. 4 interview.

Trade Surplus

Exports rose for the first time in 19 months in October from a year earlier, helping the nation post an unexpected trade surplus. Consumer prices climbed less than analysts estimated in November, rising 8.37 percent from a year earlier.

Inflation in 2013 may be less than 8.5 percent and will ease to about 3.5 percent to 5.5 percent in 2014, Bank Indonesia said today.

“The policy is consistent with the effort to direct inflation toward the target range of 3.5 to 5.5 percent in 2014 and bring the current-account deficit down to a more healthy and sustainable level,” Bank Indonesia said in a statement today.

The authority will strengthen financial-market deepening and increase instruments in the foreign-exchange market by implementing a mini master repo agreement among eight of Indonesia’s top 15 banks and expanding covering of mid- and long-term hedging swaps between lenders and Bank Indonesia, it said. The swaps instrument will provide enough dollar supply locally, it said.

Weaker Growth

Indonesia is confronting weaker growth prospects after tightening monetary policy this year. Economic expansion slowed last quarter to the weakest since the 2009 global recession, as GDP increased 5.62 percent in the three months ended Sept. 30 from a year earlier.

The central bank predicts the economy will expand this year within the previously projected range of 5.5 to 5.9 percent, it said today. Lending growth as of October was 22.2 percent from a year earlier, slowing from 23.1 percent in September, in line with the cooling economy and impact from past rate increases, it said.

“Last month Bank Indonesia unexpectedly raised its benchmark rate even when there was no pressure to raise it,” Lana Soelistianingsih, an economist at PT Samuel Sekuritas Indonesia in Jakarta, said before the decision. “Right now the market sees the economy as worse than expected.”

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