Bloomberg News

Indonesia Holds Interest Rate a Fourth Month as Rupiah Gains

June 09, 2011

(Updates with comment from economist in fourth paragraph.)

June 9 (Bloomberg) -- Indonesia’s central bank kept its benchmark interest rate unchanged for a fourth straight month as a strengthening currency helped contain inflation in Southeast Asia’s largest economy.

Bank Indonesia maintained the reference rate at 6.75 percent, it said in a statement in Jakarta today. The decision was predicted by all 14 economists surveyed by Bloomberg News.

President Susilo Bambang Yudhoyono’s policy makers have extended fuel subsidies and let the rupiah gain the most after Taiwan in Asia this year to damp price gains, as rising food and oil costs force China, Thailand, India, Vietnam, Malaysia and the Philippines to raise rates. Indonesia’s inflation eased for a fourth month in May, to below 6 percent.

“Bank Indonesia remains comfortable that its policy to allow the currency to appreciate to curb imported inflation is working,” said Enrico Tanuwidjaja, an economist at OSK-DMG Group in Singapore. “Bank Indonesia should start thinking about frontloading rate increases because core inflation is still edging higher.”

Indonesia’s rupiah rose to a seven-year high yesterday on speculation the central bank will favor appreciation to help tame inflation. The currency touched 8,499 per dollar, the strongest level since March 2004, according to data compiled by Bloomberg. It traded at 8,524 at 1:50 p.m. in Jakarta today.

Thailand, Malaysia

The currency has climbed even as Governor Darmin Nasution refrained from adding to the central bank’s first rate increase in more than two years in February while neighbors from Thailand to the Philippines tightened monetary policy further.

“The continuing trend of rupiah appreciation is in line with Bank Indonesia efforts to mitigate inflation pressures, particularly those stemming from imported inflation,” the central bank said today, adding it will also watch the impact of currency gains on economic growth.

Neighboring Thailand raised rates last week for the fourth time this year to damp accelerating inflation, boosting the one- day bond repurchase rate by a quarter of a percentage point to 3 percent. The Philippine central bank increased the rate it pays lenders for overnight deposits to 4.5 percent in May from 4.25 percent in its second move this year, while Bank Negara Malaysia lifted the overnight policy rate by a quarter-point to 3 percent.

“There are no signs that the economy is overheating, so why would Bank Indonesia raise interest rates?” Damhuri Nasution, an economist at PT Danareksa Sekuritas in Jakarta, said before the decision. “If Bank Indonesia raises the key rate, it would increase capital flows.”

Core Prices Rising

Indonesia’s consumer prices rose 5.98 percent last month from a year earlier, less than the 6.16 percent gain in April. Core inflation accelerated to 4.64 percent from 4.62 percent in April. Danareksa Sekuritas estimates that inflation won’t exceed 6 percent this year, and Bank Indonesia predicts inflation may be 4 percent to 6 percent this year.

“The continuing increase in core inflation is driven by the increase in global commodity prices, accelerating domestic demand, and relatively high inflation expectation,” the central bank said. “Bank Indonesia is continuously vigilant to these risks on accelerating core inflation pressures, as well as inflation pressures that may rise from government policy relating to fuel and electricity subsidies.”

Growth Slows

Indonesia, Southeast Asia’s biggest economy, expanded 6.5 percent last quarter from a year earlier, slowing from 6.9 percent in the previous three months. Gross domestic product may rise 6.5 percent to 6.9 percent in 2012, Finance Minister Agus Martowardojo said May 20. The central bank said today it expects growth to be at the upper end of a range of 6 percent to 6.5 percent.

“Maintaining interest rates at this current level is boosting economic growth and improving property demand,” Handaka Santosa, vice president director at PT Agung Podomoro Land in Jakarta, Indonesia’s third-biggest property developer by revenue, said before the decision.

Indonesian banks’ lending rose 23.5 percent from a year earlier as of May, driven by new investment loans, Muliaman Hadad, deputy governor at Bank Indonesia, said this week.

The rupiah’s appreciation is in line with the strengthening of other regional currencies and isn’t having a “negative impact” on exports, the central bank said today. Bank Indonesia will keep monitoring the risk to core inflation, it said.

--With assistance from Berni Moestafa in Jakarta and Shamim Adam in Singapore. Editors: Stephanie Phang, Greg Ahlstrand

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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