Indonesia Holds Key Rate as Wider Current-Account Gap Seen

Indonesia’s central bank held its key interest rate for a sixth straight meeting and said it will keep a tight monetary policy stance, seeking to contain a widening current-account gap.

Bank Indonesia Governor Agus Martowardojo and his board maintained the reference rate at 7.5 percent, the central bank said in Jakarta today, a decision predicted by all 21 economists surveyed by Bloomberg News. It also kept the deposit facility rate unchanged at 5.75 percent.

Martowardojo has extended a pause on monetary policy after embarking on the country’s most aggressive rate-tightening cycle in eight years in 2013 to curb the current-account deficit, support the rupiah and cool inflation. Consumer-price gains eased to a ten-month low in April, while gross domestic product growth in Southeast Asia’s largest economy missed analysts’ estimates last quarter.

“BI will likely remain on hold to ensure external account stability, cap inflation expectations, and maintain policy stability,” Glenn Maguire and Daniel Wilson, economists at Australia & New Zealand Banking Group Ltd, said in a research note after the announcement.

The country’s current-account gap from January through March was $4.1 billion, or 2.06 percent of gross domestic product, compared with 1.98 percent of GDP in the previous three months, Martowardojo said. The deficit may peak in the April-June quarter, Perry Warjiyo, deputy governor, said.

The rupiah gained 0.1 percent to close at 11,560 per dollar in Jakarta, rebounding from a two-week low reached earlier, prices from local banks show. It has declined 1.7 percent this quarter to be the worst performer among 11 most-traded Asian currencies tracked by Bloomberg, paring this year’s gains to 5.3 percent.

Current Account

The rupiah may see some downward pressure should the current-account deficit widen as forecast by the central bank and U.S. rates move higher, particularly toward the year-end, Sacha Tihanyi, a currency strategist at Scotiabank in Hong Kong, said today.

The current-account gap is widening because of declining economic growth and lower-than-expected exports, Martowardojo said. Bank Indonesia today reduced its forecast for GDP this year to a range of 5.1 percent to 5.5 percent, from a previous estimate for as much as 5.9 percent. The nation’s economic growth eased to 5.21 percent in the three months ended March 31 from a year earlier, prompting analysts from Nomura Holdings Inc. to DBS Group Holdings Ltd. to cut their 2014 forecasts for the economy.

“External and domestic factors give no room for BI to cut the key rate to support the economy, as the Fed may start to raise its rate next year,” Destry Damayanti, Jakarta-based chief economist at PT Bank Mandiri, said ahead of the decision.

Ore Ban

Growth slowed as interest-rate increases curbed investment and a January mineral-ore ban hurt the mining industry, the country’s statistics office said on May 5. Investment grew 14.6 percent from a year earlier in the first quarter, compared with last year’s 27 percent, government data showed on April 24.

China’s economic slowdown is weighing on the outlook for Indonesia’s exports even as the trade balance improves, Finance Minister Chatib Basri said May 2.

The central bank said inflation could end the year at about 5 percent, within its 2014 target of 3.5 percent to 5.5 percent. Consumer prices rose 7.25 percent in April from a year earlier, slowing from 7.32 percent in March.

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