Indonesia Holds Interest Rate as Inflation Concerns Loom

  • Central bank eased policy six times last year to spur growth
  • Policy makers on guard for possible capital outflows

Indonesia’s central bank left its benchmark interest rate unchanged for a sixth month as policy makers keep their focus on managing price pressures and bolstering the currency of Southeast Asia’s biggest economy.

Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.75 percent on Thursday, as forecast by all 24 economists surveyed by Bloomberg. The bank lowered rates six times last year, with the last move in October.

While consumer prices rose at a slower pace than economists predicted in March, inflation is set to pick up this year. Senior Deputy Governor Mirza Adityaswara signaled earlier this month that Bank Indonesia -- which aims to keep average inflation in a range of 3 percent to 5 percent -- was paying close attention to volatile food prices.

The central bank is also on guard against capital outflows as the U.S. Federal Reserve tightens monetary policy, reducing the appeal of emerging-market assets.

The central bank is maintaining a neutral stance while being ready to raise rates if the conditions warranted, Dody Budi Waluyo, executive director for economic and monetary policy at Bank Indonesia, told reporters after the decision was announced.

First quarter growth was below expectations, due to slowing private consumption, but was expected to pick up in the second quarter, driven by exports and domestic consumption, the central bank said. Monetary policy transmission had been slower pace as banks become more conservative, it said.

Consumer prices rose 3.6 percent in March from a year earlier. Inflation will probably average 4.3 percent this year, according to the median estimate in a Bloomberg survey of economists.

A rate cut is unlikely this year despite the weak outlook for the economy as inflation remains a concern for the central bank, said Gareth Leather, a senior economist at Capital Economics Ltd. in London. Prices are “likely to rise again in the coming months due to an increase in administered energy prices.”

“Another worry for the central bank is the outlook for the rupiah,” Leather said. “Although it has remained broadly stable in recent months, BI is worried that aggressive rate hikes by the U.S. Fed could cause the currency to slump. Indonesia’s relatively high level of foreign-currency denominated debt makes it vulnerable.”’

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