Photographer: Dimas Ardian/Bloomberg

Indonesia Keeps Rates Steady as Inflation Pressures Increase

  • Prices rose at the fastest pace in more than a year in April
  • All but one of 25 economists surveyed forecast bank would hold

Indonesia’s central bank left its benchmark interest rate unchanged for a seventh month as inflation heads closer to the top of the target band.

Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.75 percent on Thursday, as forecast by all but one of the 25 economists surveyed by Bloomberg. The bank went on a cutting spree last year as it lowered rates six times, but has been on hold since the last move in October.

“With the economy struggling to gain momentum, but inflationary pressures on the rise, Bank Indonesia’s decision to keep interest rates on hold at 4.75 percent today came as no surprise,” said Gareth Leather, a senior Asia economist at Capital Economics Ltd. in London. He forecasts rates will probably remain on hold for the rest of the year.

Consumer prices rose at the fastest pace in more than a year in April, gaining 4.17 percent from a year earlier. With households expected to stock up on food items in the lead up to Ramadan, the fasting month during which Muslims commonly mark the end of each day with feasts, price pressures are rising. The central bank aims to keep inflation in a range of 3 percent to 5 percent.

Bank Indonesia said inflation is “manageable,” but it faces risks, including higher energy costs and a pick up in food prices. Going forward “policy coordination between the government and Bank Indonesia in managing inflation will continue to be strengthened,” it said.

The central bank is forecasting economic growth of 5.1 percent in the second quarter and above 5.2 percent in the following two quarters. It sees expansion of 5 percent to 5.2 percent next year.

Bank Indonesia has sought to support growth in the economy by easing reserve limits on lenders from July. The move may spur credit growth, adding the equivalent of 0.4 percent to 0.5 percent of gross domestic product, or close to 1 percent of broad money to the banking system, according to Credit Suisse Group AG.

The currency, which has gained 0.9 percent against the dollar this year, is being supported by foreign capital inflows, an improvement in the sovereign rating outlook and better domestic economic prospects, the central bank said.

— With assistance by Yudith Ho, Harry Suhartono, and Manish Modi

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