Bloomberg News

Indonesia Holds Key Rate as Growth Withstands Global Risks

November 08, 2012

Indonesia kept its benchmark interest rate unchanged for a ninth straight meeting as economic growth exceeding 6 percent reduced the need for monetary stimulus.

Bank Indonesia Governor Darmin Nasution and his board held the reference rate at a record-low 5.75 percent, the central bank said in Jakarta today. The decision was predicted by all 16 economists surveyed by Bloomberg News.

Indonesia’s growth has outperformed every major Asian economy after China this year as the world’s fourth-most populous nation lures investment, helping gross domestic product expand 6.17 percent last quarter from a year earlier. The country has avoided adding to a February rate cut while neighbors from Thailand to the Philippines extended monetary easing to counter faltering global growth, as the region’s worst-performing currency this year boosted inflation pressure.

“Growth is persisting compared with other Asian economies,” Edimon Ginting, a deputy country director at the Asian Development Bank’s Indonesian resident mission based in Jakarta, said in a telephone interview before the decision. “There’s no room for the central bank to add stimulus for the economy as we see the currency remaining under pressure and core inflation will probably increase.”

The rupiah weakened 0.3 percent to 9,638 per dollar as of 1:58 p.m. in Jakarta. It has fallen more than 6 percent this year, the biggest decline among 11 most-traded Asian currencies tracked by Bloomberg, reducing the scope for monetary easing. The Jakarta Composite index slid 0.9 percent.

Inflation Quickens

Indonesia’s consumer prices climbed 4.61 percent in October from a year earlier, pushing inflation to a 13-month high. The core inflation rate was 4.59 percent, compared with a 4.12 percent pace the month before.

“Further interest-rate cuts in Indonesia are unlikely,” Gareth Leather, Asia economist at Capital Economics Ltd., said in a note after the decision. “As one of the least trade- dependent economies in Asia, Indonesia is well-positioned to withstand the impact of weak global demand.”

President Susilo Bambang Yudhoyono has pledged to build more highways, airports and ports to improve infrastructure and meet a growth target of an average 6.6 percent by the end of his second term in 2014. The government expects growth to accelerate to the fastest pace since before the Asian financial crisis next year on investment and infrastructure spending.

Growth Forecast

GDP may expand 6.6 percent in 2013, compared with the official budget target of 6.8 percent, Vice Finance Minister Anny Ratnawati said in an interview this week. That would be the biggest gain since 1996, based on International Monetary Fund data. Growth may be 6.4 percent this year, she said.

“Economic growth is expected to accelerate, supported by strong domestic consumption and investment,” the central bank said today. “Exports are expected to improve with the recovery in some trading partners, although the outlook remains shadowed by global economic uncertainty.”

L’Oreal SA, the world’s largest cosmetics maker, expects to boost sales in Indonesia by as much as 35 percent over the next five years as an expanding middle class spurs demand. Annual revenue for this year and next will probably rise more than 30 percent in the country, Vismay Sharma, the company’s country chief, said in an Oct. 29 interview. L’Oreal yesterday inaugurated a new West Java plant that will be its largest factory globally.

External Pressure

Bank Indonesia reduced the 2012 growth target to 6.3 percent from 6.5 percent, Dody Budi Waluyo, an executive director of strategic planning and public relations at the authority, said today. The central bank kept the forecast for 2013 at 6.3 percent to 6.7 percent.

Inflation remains manageable and will probably be at the midpoint of Bank Indonesia’s target range of 3.5 percent to 5.5 percent at the end of this year, the central bank said. Loans growth as of the end of September was 22.9 percent from a year earlier, it said.

Pressure on external balances are beginning to ease as the current account and balance of payments improve, it said. The rupiah’s movement is still in line with market conditions, and the intensity of the depreciation is easing, Bank Indonesia said.

The current-account deficit in the third quarter narrowed to 2.4 percent of GDP, or $5.34 billion, from 3.5 percent in the second quarter, the bank said, citing a recovery in the trade balance as consumption goods imports decline. The balance of payment last quarter was a surplus of $834 million, and that may increase as the capital account is boosted by foreign direct investments, it 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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