Bloomberg News

Indonesia Takes Steps to Reduce Cash as Interest Rate Held

May 10, 2012

Indonesia took steps to reduce excess funds in the economy while extending a pause in interest-rate cuts as a declining currency and the threat of higher fuel prices push up inflation risks. The rupiah rose.

Bank Indonesia will raise the rates on central bank bills and term deposits of all tenors starting today to absorb liquidity, it said in Jakarta, without specifying the levels. Governor Darmin Nasution and his board held the reference rate at 5.75 percent, a decision predicted by all 21 economists in a Bloomberg News survey.

Pressure to reverse monetary easing is mounting in Southeast Asia’s biggest economy after inflation accelerated to 4.5 percent in April, with the government’s bid to contain fuel subsidies and a weakening rupiah threatening to boost prices. At the same time, a growth slowdown to 6.3 percent last quarter has reduced the scope for raising rates.

“This is a signal that BI will start to normalize its monetary policy,” said David Sumual, a Jakarta-based economist at PT Bank Central Asia. “The period for cutting rates is over unless there’s a risk of a deepening global slowdown.”

The rupiah climbed 0.9 percent to 9,183 per dollar at 4:05 p.m. in Jakarta, paring its loss this year to about 1 percent. Before today’s central bank measures, the currency had fallen about 2 percent this year, the worst performer after the yen in a basket of 11 Asian currencies tracked by Bloomberg. It fell to its weakest in almost two years last week.

Yields Rise

The yield on the government’s 7 percent bonds due May 2022 climbed four basis points, or 0.04 percentage point, to a four- month high of 6.21 percent, according to closing prices from the Inter Dealer Market Association. It’s climbed 17 basis points this week.

Asian nations have diverged as some kept rates steady or cut borrowing costs to shield their economies from Europe’s debt crisis and a growth slowdown in China, while others tightened to limit price gains.

Indonesia has kept its benchmark unchanged for three straight meetings since an unexpected reduction in February, while South Korea held borrowing costs at 3.25 percent for the 11th time today.

Bank Indonesia is raising the rates of all its monetary instruments of all tenors because of inflationary pressure and the rupiah’s weakness, Hendar, director of monetary policy at the central bank, said today. The purpose is to push up the yields of medium and long-term government bonds, said Hendar, who uses only one name.

Preferred Course

The central bank sold 7.17 trillion rupiah ($781 million) of nine-month bills at 4.23785 percent and 220 billion rupiah of nine-month Shariah-compliant bills at a yield of 4.23785 percent, it said in a statement today.

Tightening via short-term monetary instruments “rather than via the policy rate, is the preferred first course of action,” said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch. “BI will likely keep the policy rate on hold given the uncertainty over fuel prices and inflation outlook.”

Consumer-price pressure is manageable, Bank Indonesia said today, adding it would continue to absorb liquidity in the market. It maintained its gross domestic product growth forecast for the year at 6.3 percent to 6.7 percent.

Inflation Target

The monetary authority said the rupiah would strengthen, and kept its inflation target for 2012 and 2013 at 3.5 percent to 5.5 percent. Lending growth was 24.9 percent from a year earlier as of March.

The country’s parliament rejected a proposal for a 33 percent increase in subsidized-fuel prices from April 1 after public protests. Lawmakers instead allowed the government to raise prices only if the Indonesia Crude Price exceeds the state budgetary assumption of $105 a barrel by 15 percent over a six month period. Authorities now plan to cap the sale of below market-rate fuel for certain vehicles.

“Even if subsidized fuel prices are not raised this year, we would expect headline inflation to get close to 6 percent by year-end, rising further during the course of 2013,” said Robert Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse Group AG. “Nevertheless, in view of what we see as a ‘go for growth’ policy in Indonesia, it seems unlikely that the politically sensitive policy rate would be hiked” until inflation is at least half a percentage point higher, he said.

To contact the reporters on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net; Hidayat Setiaji in Jakarta at hsetiaji@bloomberg.net

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


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