Bank Indonesia Holds Policy Interest Rate, Supporting Rupiah

Indonesia left its main interest rate unchanged after a surprise cut last month, supporting the central bank’s stated stance of keeping monetary policy tight. The rupiah extended gains after the decision.

Governor Agus Martowardojo and his board kept the reference rate at 7.5 percent, Bank Indonesia said in Jakarta on Tuesday. Fifteen of 17 economists surveyed by Bloomberg News had predicted the decision, while two forecast another cut. The central bank also held the rate it pays lenders on overnight deposits, known as the Fasbi, at 5.5 percent.

Bank Indonesia refrained from joining counterparts in South Korea and Thailand in cutting borrowing costs this month, as Southeast Asia’s biggest economy grapples with a persistent current-account deficit and Asia’s worst performing currency against the dollar this year. The rupiah has dropped more than 3 percent since Indonesia cut interest rates by 25 basis points last month, a move it took as inflation eased.

“BI is quite conscious that Indonesia needs to attract portfolio flows to fund the current-account deficit,” Daniel Wilson, an economist at Australia & New Zealand Banking Group Ltd. in Singapore, said before the decision. “A hold will not stem the decline in the rupiah, but it will signal to the market that BI won’t carry out an aggressive easing cycle and will take into account market moves.”

The rupiah advanced 0.5 percent to 13,174 a dollar as of 3:21 p.m. in Jakarta, after gaining 0.4 percent earlier, prices from local banks show. It had fallen to its lowest level in 17 years in the month since Bank Indonesia cut interest rates on Feb. 17, the first easing in three years. No economist surveyed predicted that cut. The benchmark stock index pared gains.

Bank Indonesia’s focus is on maintaining rupiah stability and the authority will continue intervening to stabilize the currency and bonds if needed, it said, pledging to guard the rupiah in line with fundamentals and remain vigilant on inflation.

Growth Forecast

The central bank is preparing policies to deepen the foreign exchange market by widening the availability of financial instruments, said Tirta Segara, its spokesman.

The benchmark rate is consistent with inflation expectations and in line with the central bank’s current-account deficit target, Bank Indonesia said. The current-account gap this quarter will be smaller than in the fourth quarter, it said.

Economic growth will probably improve in the first quarter even amid limited investment growth, it said, forecasting gross domestic product will expand 5.4 percent to 5.8 percent in 2015.

The economy shrank last quarter from the previous three months while full-year 2014 growth was 5 percent. President Joko Widodo wants to lift growth to 7 percent in the coming years.

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