Bloomberg News

Indonesia Holds Rate as Fuel-Subsidy Plan Raises Price Risk

April 11, 2013

Indonesia held its benchmark interest rate for a 14th consecutive meeting as plans to cut fuel subsidies boost inflation risks, reducing scope for monetary easing even as falling exports crimp economic growth.

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.

President Susilo Bambang Yudhoyono is due to review proposals for a new fuel policy today as officials seek to limit energy subsidies that have spurred oil imports, depleted foreign-exchange reserves and weakened the rupiah. Higher gasoline and diesel prices or restrictions on the use of partially government-funded fuel would add to inflation, which accelerated to a 22-month high in March.

“Inflation’s a more immediate concern given that it’s already well above their target,” said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “The case for rate hikes is still there,” he said, adding that the central bank may begin to tighten policy in the second half of the year.

The rupiah fell 0.2 percent to 9,705 per dollar at 3:48 p.m. in Jakarta, the first decline in three days, prices from local banks compiled by Bloomberg show. It declined for a seventh quarter in the three months through March in the longest losing streak since 1998, and is the worst performer in the past 12 months after the yen and the Indian rupee among 11 Asian currencies tracked by Bloomberg.

Key Challenge

Bank Indonesia today said the nation’s gross domestic product may increase 6.2 percent to 6.6 percent this year compared to a previous forecast of 6.3 percent to 6.8 percent. Growth next year may be 6.6 percent to 7 percent, it said, from an earlier estimate of 6.7 percent to 7.2 percent.

“The resilience of private consumption has been supported by improvements in consumers’ purchasing power and consumer confidence,” Bank Indonesia said in a statement today, adding that it expects pressure on price gains and the rupiah to ease.

Indonesia spent 211.9 trillion rupiah ($22 billion) on fuel subsidies last year, spurring demand for energy products that contributed to a record trade deficit in October. Containing the subsidy bill will be a key challenge for the successor to Finance Minister Agus Martowardojo, who is set to replace Nasution at the central bank.

No Room

Options for changes in the fuel policy have been completed at the office of the Coordinating Minister for the Economy and will be presented to Yudhoyono at a cabinet meeting today, according to Firmanzah, a senior staff member for economic affairs at the president’s office.

Nasution, whose term ends in May, said last week the central bank “cannot avoid” raising borrowing costs if needed. Inflation, which accelerated to a faster-than-estimated 5.9 percent in March, may be 5.3 percent by the end of 2013 compared with an earlier forecast of about 4.9 percent, Perry Warjiyo, executive director for monetary policy and economic research at Bank Indonesia, said this week.

“There’s no room for BI to cut the rate as inflation risks are high,” said Juniman, chief economist at PT Bank Internasional Indonesia. “The markets are waiting for the government policy on fuel subsidies.”

Bank Indonesia raised the rate it pays lenders on overnight deposits, known as the Fasbi, in August to 4 percent from 3.75 percent. The reference rate is still consistent with the central bank’s target for inflation, unless the government unveils a new policy to cut fuel subsidies, Warjiyo has said.

Monetary Operations

The Southeast Asian nation’s quickening inflation contrasts with countries from China to the Philippines, where easing cost pressures have reduced the need to tighten policy. Bank Indonesia doesn’t see the need for special policy measures to curb price gains, as it expects long-term pressure to ease, Deputy Governor Hartadi Sarwono said in a briefing today.

The central bank will strengthen monetary operations and use longer-term term deposits and bills to absorb excess liquidity, Sarwono said, adding that such a move precludes the need to raise interest rates at this time.

The Bank of Korea today held borrowing costs for a sixth month, resisting pressure from the government for a reduction to support growth. While Indonesia’s gross domestic product has risen more than 6 percent for nine straight quarters, the economy expanded in the three months through December at the slowest pace in more than two years.

“Monetary conditions have been too loose for too long, creating imbalances within the economy,” said Robert Prior- Wandesforde, a Singapore-based economist at Credit Suisse Group AG. “Higher interest rates are necessary and provide the most likely trigger for an unwinding of some of the excesses that have built up in the Indonesia economy.”

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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