Stay Calm, BI Says as It Keeps Rate at 6%
Bank Indonesia has kept its benchmark interest rate unchanged at 6 percent, a level it says will allow it to meet its inflation target and stabilize jittery financial markets.
The decision was predicted by 17 of 22 economists surveyed by Bloomberg News, with the rest predicting a 25-basis-point cut. Eleven of 15 economists in a Reuters poll also anticipated Thursday’s rate hold, with the balance forecasting a 25-basis-point cut.
Bank Indonesia said in a statement announcing the decision that amid a worsening outlook for global economic growth, the “board of governors views that current BI rate is still consistent with inflation targets, and remains conducive for financial stability.”
The bank said its evaluation of the domestic economy showed that growth would remain strong. It is targeting domestic inflation of 4 to 6 percent this year, easing to 3.5 to 5.5 percent in 2012. Consumer prices in Southeast Asia’s biggest economy rose 4.15 percent last month compared to a year earlier, the least in 19 months.
On growth, the central bank forecasts that Indonesia will expand 6.5 percent in the final quarter of the year, bringing growth for the year to 6.5 percent.
“This strong economic growth is led by the manufacturing sector, transportation and the communication sector, as well as the trade, hotel and restaurant sectors,” the central bank said.
Thursday’s decision came after the bank cut the benchmark BI rate by 25 basis points in October and 50 basis points in November.
Some analysts said continuing to loosen policy aggressively could trigger capital outflows at a time when markets were worried about the euro zone debt crisis.
Ryan Kiryanto, chief economist at state lender Bank Negara Indonesia, praised the central bank’s move, saying it was the right decision to maintain the attractiveness of Indonesian portfolio assets and because more cuts might accelerate inflation.
Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong, said, “Bank Indonesia’s decision to stay put on rates reflects concerns over capital outflows.” Kowalczyk added that he expected a 25-basis-point cut in the first half of next year given slow inflation.
The rupiah has slumped more than 5 percent in the past three months, the third-worst performer in Asia, threatening to push up imported inflation even as the protracted European debt crisis hurts global growth.
New Zealand and South Korea also kept rates unchanged on Thursday, as the region’s policy makers juggle the need to guard against price gains with increasing pressure to protect their economies. Australia and the European Union, however, have both cut their interest rates this month amid fears of a global slowdown.
“With higher inflation expectations next year and to guard the rupiah, I think it’s fair to hold the interest rate,” Juniman, chief economist at Bank Internasional Indonesia in Jakarta, said before the decision.
“It’s not easy for BI to save the rupiah after they cut rates in the past two months amid the turmoil in Europe.”
The rupiah strengthened slightly after the rate decision, at 9,050 per dollar versus 9,070 beforehand. The rupiah has weakened about 0.5 percent since the start of the year.
Bank Indonesia has been intervening in the currency market to prop up the rupiah. The country’s foreign exchange reserves stood at $111.3 billion at the end of November, $13.3 billion less than at the end of August.