Bank Indonesia may begin raising the rate it pays lenders for overnight deposits as early as this week to shore up Asia’s worst-performing currency in the past year, as the largest trade deficit since at least 2008 revives pressure on the rupiah.
The central bank may increase the deposit facility rate, also known as the Fasbi, by a quarter of a percentage point to 4.25 percent tomorrow even as it keeps the benchmark reference rate unchanged, according to United Overseas Bank Ltd. economist Ho Woei Chen. Bank of America Corp. and DBS Group Holdings Ltd. (DBS), Southeast Asia’s largest lender, forecast the measure will rise to 4.75 percent by mid-2013.
The rupiah has dropped more than 6.5 percent against the dollar in the past year as rising imports and declining exports led to a widening current-account deficit and a trade gap of $1.5 billion in October. The central bank, which has refrained from adding to a February reduction in its key rate, will need to boost short-term borrowing costs to restrain domestic demand and support fund inflows, DBS economist Eugene Leow said.
“With the trade balance so wide, it seems likely for Bank Indonesia to hike soon,” Singapore-based Leow said. “The most acute period is around now. If the central bank can temper import growth and ensure sufficient external funding, then Indonesia is well poised to maintain its growth profile next year.”
The local currency was little changed at 9,655 per dollar as of 9:50 a.m. in Jakarta, after reaching a three-year low of 9,675 on Dec. 7, according to prices from local banks compiled by Bloomberg.
The monetary authority raised the deposit facility rate in August to 4 percent from 3.75 percent. None of the 18 economists surveyed expect a change in the reference rate from the current record-low 5.75 percent.
Bank Indonesia may “gradually” increase the deposit facility rate to help reduce volatility in the currency that may hurt investor confidence, Deputy Governor Hartadi Sarwono said in a Nov. 9 interview in Jakarta. The central bank may begin raising its benchmark interest rate in the middle of 2013, according to DBS and UOB analysts.
Indonesia’s October trade deficit may have been the biggest on record, the statistics bureau said Dec. 3. It was caused by a surge in imports due to plane and oil purchases, it said.
The country’s current-account shortfall this year will be 2.2 percent of its gross domestic product, central bank Governor Darmin Nasution said last week, a gap that would be the largest since 1997. Indonesia has recorded a current-account deficit for the past four quarters.
The gap in the current-account balance is already reduced by capital inflows into local-currency sovereign bond holdings, which increased 19.5 trillion rupiah ($2 billion) in November, the most since data going back to 2003, according to the Finance Ministry.
“Bank Indonesia is pressured by the current-account deficit and the weakening currency, so they have to raise interest rates,” UOB’s Ho, based in Singapore, said. “A Fasbi rate hike will help rupiah sentiment slightly and see investors put more money into the country to see higher return.”
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