Indonesia Holds Key Rate as Narrower Deficit Aids Currency

Indonesia kept its key interest rate unchanged for a third straight meeting as a narrowing current-account deficit and slowing inflation reduced the need for tighter monetary policy. The rupiah rose the most in a month.

The central bank held the reference rate at 7.5 percent, it said in Jakarta today, a decision predicted by 18 of 19 analysts in a Bloomberg News survey. One expected a 25 basis-point increase. It kept the deposit facility rate at 5.75 percent.

The Indonesian economy grew at the slowest pace in four years in 2013 as central bank Governor Agus Martowardojo embarked on a series of rate increases to shore up the rupiah and reduce a record current-account gap. With easing import demand, a shrinking deficit and an improving currency, some analysts are predicting the tightening cycle may be over.

“In a global environment where having a worsening current-account deficit is akin to having a ‘Danger, Do Not Enter’ sign hung at the gate, today’s data would go a long way in Indonesia’s rehabilitation process,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “There is a good chance that BI may actually keep the rates unchanged for the whole of this year.”

The rupiah climbed 0.8 percent to 11,985 against the U.S. dollar as of 5:04 p.m. in Jakarta, prices compiled by Bloomberg from local banks show. The currency has gained 1.6 percent this year, the most among 24 emerging-market currencies tracked by Bloomberg. It plunged 21 percent last year.

‘Hawkish Bias’

The current-account deficit narrowed to 1.98 percent of gross domestic product in the final three months of 2013, Martowardojo said today. The gap was 3.8 percent in the third quarter, from a record-high of 4.4 percent in the three months through June.

“Room to keep rates on hold has now emerged and we anticipate that Bank Indonesia will extend this on-hold period for the foreseeable future while maintaining a hawkish bias,” said Daniel Wilson, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “We do not rule out further policy tightening, however the data will need to turn worse for us to expect more action.”

Bank Indonesia will keep its policy stance tight as long as inflation remains elevated and the current-account deficit is not at a “healthy level” of 2 percent, Deputy Governor Perry Warjiyo told reporters today.

Elevated Inflation

The current-account gap was probably about 3.26 percent of GDP last year, and may narrow to 2.5 percent in 2014, the central bank said today. It may be about 2 percent of GDP in 2015, Warjiyo said.

Consumer prices rose 8.22 percent in January from a year earlier after an 8.38 percent gain in December, and the rate has stayed above 8 percent for seven months. Inflation will remain elevated this month and next because of bad weather, Martowardojo said Feb. 7.

Gross domestic product increased 5.72 percent in the three months ended Dec. 31 from a year earlier, beating estimates even as analysts said the acceleration may be short-lived amid the impact of higher borrowing costs on the economy. Bank Indonesia said today the impact of higher rates on bank lending will take about six months to a year to be felt.

The central bank also reiterated today economic growth this year will be at the lower end of its forecast range of 5.8 percent to 6.2 percent.

Household consumption increased 5.25 percent in the fourth quarter from a year earlier compared with a previously reported 5.48 percent gain in the third quarter, government data showed. Investment growth slowed to 4.37 percent last quarter from a year earlier.

Ten of 11 economists forecast no change in the rate Bank Indonesia pays lenders on overnight deposits, also known as the Fasbi. One predicted a 25 basis-point increase.

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