Indonesia Sees Chance for Policy Easing in 2015: Southeast Asia

Indonesia will have a chance to ease monetary policy next year as inflation slows, after maintaining a tight stance in 2014, Bank Indonesia Deputy Governor Halim Alamsyah said.

Inflationary pressures are easing after interest rates were raised last year, Alamsyah said in an interview at Bank Indonesia in Jakarta yesterday. Consumer-price gains will probably slow to about 5 percent by the end of this year and less than 4.5 percent in 2015, he said.

“We’re not ruling out a change in the monetary policy stance next year,” said Alamsyah, 57, one of five deputies at the authority. Higher interest rates have already led to economic adjustments, and “if the U.S., China and Japan economies recover, this is our chance,” he said.

Southeast Asia’s largest economy is regaining investor confidence this year as national elections spur spending while the biggest rate-tightening cycle in eight years in 2013 helped rein in the current-account shortfall and damp price pressures. The rupiah has rebounded to become the region’s top gainer after trailing its major Asian peers last year.

“We have the basic ingredients, such as stabilizing inflation and rupiah that have been supporting exports and balancing the current-account deficit,” Alamsyah said.

The rupiah fell 0.1 percent to 11,437 per dollar as of 1:04 p.m. in Jakarta, according to prices from local banks. It has gained more than 6 percent this year, the most among 11 Asian currencies tracked by Bloomberg. The yield on five-year government bonds declined one basis point, or 0.01 percentage point, to 7.58 percent, the lowest level since November, according to the Inter Dealer Market Association.

‘Tight’ Policy

“We’ll maintain a tight monetary policy so that we can achieve a soft landing,” Alamsyah said, referring to the policy stance in 2014. “We want to achieve stabilization without overkill to our economy, as we see that domestic demand remains strong. We don’t want strong domestic demand to give pressure to inflation and increase the demand for imports that are unfavorable for the current account.”

The current monetary policy remains ideal to help balance external and internal factors, unless there’s a change in government policies such as an increase in subsidized fuel prices, the deputy governor said.

Bank Indonesia kept its benchmark reference rate unchanged at 7.5 percent for a fifth straight meeting this month, after inflation eased to a nine-month low of 7.32 percent in March.

“We see BI keeping rates as it is the path of least resistance,” said Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp. “BI remains predominantly guided by the need to crimp the current-account deficit. It is likely to still feel compelled to keep real rates high to crimp consumption growth to prevent another current-account deficit blow-up.”

Foreign Funds

Should inflation be about 5.5 percent by the end of this year and the reference rate remain at 7.5 percent, the real interest rate would be about 1 percent to 2 percent, a level that’s positive for investors, Alamsyah said.

Foreign funds have poured more than $2.7 billion into Indonesian stocks this year on optimism a new government will bring better economic policies.

Jakarta Governor Joko Widodo is the frontrunner to replace President Susilo Bambang Yudhoyono, after his Indonesian Democratic Party of Struggle, or PDI-P, led unofficial results in an April 9 parliamentary election. It scored just under 20 percent of the vote and has since secured the backing of the National Democratic Party to ensure Widodo has enough support to stand for the presidency in the July elections.

New Government

Widodo and PDI-P have yet to announce their policy platform. Indonesian stocks had the biggest drop since August and the rupiah slid the most in three weeks on April 10, the day after the PDI-P got less of the vote than investors had anticipated, on concern that would lead to a broader coalition government with less ability to drive through economic policies.

“We believe with the new government, we’ll remain independent, and we’ll continue to coordinate with the new economic team,” Alamsyah said. “The new government needs to run faster on making structural reforms, especially to manage the fuel subsidy as it will provide more room for the fiscal side and to manage the current-account deficit.”

Indonesia also needs structural changes in industry, mining and agriculture to manage food inflation, he said.

The nation posted a trade surplus in February of $785 million, exceeding most economists’ estimates in a Bloomberg survey. Yudhoyono’s government is targeting a current-account deficit of between 2 percent and 2.5 percent of gross domestic product in 2014, after the broadest measure of trade widened to a record 4.4 percent of GDP in the second quarter of last year.

The government needs to continue to slow down the economy until the current-account target is achieved, Finance Minister Chatib Basri said in February. Bank Indonesia last month cut its 2014 economic growth forecast to 5.5 percent to 5.9 percent.

“As the market sees that Indonesia is successful in stabilizing the economy, it boosts market confidence so that inflows come in,” Alamsyah said. “Liquidity in the market is rising so that in 2015, supported by the current soft landing, there’s room to ease monetary policy.”

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