Indonesia Holds Key Rate a Fifth Month as Inflation Eases
July 12, 2011, 7:29 AM EDTBy Novrida Manurung and Widya Utami
(Updates with economist’s comment in fourth paragraph.)
July 12 (Bloomberg) -- Indonesia’s central bank kept its benchmark interest rate unchanged for a fifth consecutive month as easing inflation gives policy makers room to assess the risk of a slowdown in global growth.
Bank Indonesia maintained its reference rate at 6.75 percent, it said in Jakarta today. The decision was predicted by all 14 economists surveyed by Bloomberg News. Policy makers increased the key rate in February, the only move this year.
Inflation in Southeast Asia’s biggest economy eased to a 12-month low in June as a 4.8 percent gain in the rupiah this year helped cap import costs. That has allowed central bank Governor Darmin Nasution to extend Indonesia’s pause in monetary tightening as Europe’s debt crisis and slowing U.S. growth threaten Asia’s exports, even as neighbors from Thailand to India and China kept raising rates.
“Inflation is retreating, while growth remains strong despite the global soft patch and disruptions from Japan’s earthquake,” said Chua Hak Bin, a Singapore-based regional economist at Bank of America Merrill Lynch. “Bank Indonesia will likely have the flexibility to stay on pause at the next policy meeting.”
Indonesia’s benchmark stock index has surged more than 30 percent in the past year on optimism the central bank’s restraint in raising rates will help support growth and bolster earnings at companies including PT Bank Mandiri, the nation’s biggest lender by assets.
Stocks Climb
The Jakarta Composite index rose above 4,000 for the first time on July 8. Bank Mandiri shares advanced to a record and PT Astra International, the largest automotive retailer, climbed 3 percent, leading gains among banks and consumer stocks.
“Lower interest rates, easing inflation and the strength of the rupiah are supporting the automotive industry,” Johnny Darmawan, President Director at PT Toyota-Astra Motor, told Bloomberg News in Jakarta on July 8.
Bank Indonesia said in a statement today it will continue “to implement the policy mix of monetary and macroprudential measures, with focus on managing domestic liquidity, capital inflows, and exchange rate appreciation that is in line with the trend of exchange rate appreciation in the Asian region.”
The country’s consumer prices rose 5.54 percent in June from a year earlier. Inflation will likely slow given last year’s “high-base” level, Nasution said this month.
President Susilo Bambang Yudhoyono’s government has raised its forecast for the economy’s expansion next year to as much as 7 percent on rising exports and investments, Melchias Mekeng, head of the parliament’s budget committee, said July 5. That compares with a projection of as much as 6.9 percent in May.
Economic Corridors
Yudhoyono, who plans to double spending on roads, ports and airports to $140 billion by the end of his term in 2014, unveiled plans last month to develop six economic “corridors” under an initiative to accelerate growth and cut poverty in the period to 2025. The regions will focus on industries including foodstuffs, energy, plantations, fishery and mining.
Indonesia’s currency has climbed the second-most in Asia this year, according to data compiled by Bloomberg on 10 regional currencies. The rupiah may strengthen further in the second half of this year, even as the gains may ease, Nasution said July 1.
“Even if borrowing costs stay at the current level, we believe there will be flows and foreign direct investment interest in Indonesia,” said Eric Alexander Sugandi, a Jakarta- based economist at Standard Chartered Plc, which estimates the rupiah may appreciate to about 8,300 per dollar by year-end.
Growth in Indonesia’s $540 billion economy slowed in the first quarter to 6.5 percent. “We’ll give priority on domestic” issues while considering global conditions, Nasution said in Jakarta on July 6.
Liquidity Watch
Malaysia’s central bank unexpectedly refrained from raising rates last week, choosing instead to order lenders to set aside more cash as it pledged to consider further policy moves after assessing economic conditions. Sri Lanka left borrowing costs unchanged for a sixth straight month, taking advantage of slowing inflation to support economic expansion.
In contrast, India’s central bank may continue to increase interest rates until inflation is “under control,” K.C. Chakrabarty, a deputy governor of the Reserve Bank of India, said July 8. China raised benchmark rates for the third time in 2011 last week.
The central bank should watch out for excess funds in the economy, said Helmi Arman, a Jakarta-based economist at Citigroup Inc.
“As inflation eases, the main concern of the central bank isn’t interest rates right now; they are more focused on the liquidity policy,” Arman said.
--With assistance from Berni Moestafa and Femi Adi in Jakarta, Shamim Adam in Singapore and Manish Modi in New Delhi. Editors: Stephanie Phang, Sunil Jagtiani
To contact the reporters on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net; Widya Utami in Jakarta at wutami@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
