Indonesia Says It Will Hold Neutral Monetary Policy Stance

  • Inflation expected to edge up after 14-month high last month
  • All 28 economists surveyed forecast central bank would hold

Indonesia’s central bank kept its benchmark interest rate unchanged as expected and signaled it will maintain its neutral stance if inflation and the currency remain in line with forecasts.

Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.75 percent on Thursday, as forecast by all 28 economists surveyed by Bloomberg. The bank went on a cutting spree last year, lowering rates six times, but has been on hold since the last move in October as inflation pressures picked up.

“We will not change our stance as long as there’s no sign of an impact on inflation, in particular core inflation, and the expectation of depreciation in the exchange rate,” Assistant Governor Dody Budi Waluyo told reporters in Jakarta.

Inflation -- which hit a 14-month high of 4.3 percent last month, mainly due to higher energy costs -- is set to remain elevated through June as Indonesians mark Ramadan, the Muslim fasting month when food prices generally spike. The central bank aims to keep inflation in a range of 3 percent to 5 percent.

Martowardojo said last week that government-controlled prices -- which climbed 9.14 percent in May from a year earlier and include costs like electricity tariffs -- would continue to be a concern for the central bank board.

Bank Indonesia eased policy last year to help support an economy that grew 5 percent in 2016. The World Bank said in its quarterly economic report on Thursday that growth will probably reach 5.2 percent this year and 5.3 percent in 2018. The central bank is forecasting expansion of 5 percent to 5.4 percent this year.

“Looking ahead, the economy would benefit from further support from the central bank," though a rate cut is unlikely, said Gareth Leather, a senior Asia economist at Capital Economics Ltd. in London.

Tighter U.S. monetary policy is also giving Indonesian policy makers reason to pause, given the potential for foreign outflows from emerging markets and currency volatility. The Federal Reserve raised interest rates on Wednesday for a second time this year and signaled it would continue on its tightening path.

Indonesia’s rupiah has gained 1.4 percent against the dollar this year, buoyed by inflows from a tax amnesty and an improving growth outlook. The currency was at 13,286 against the dollar as of 5:30 p.m. in Jakarta. The yield on benchmark 10-year government bonds dropped to 6.84 percent, the lowest rate since Aug. 18, according to data compiled by Bloomberg.

— With assistance by Harry Suhartono, and Yudith Ho

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