BI keeps rate steady with weak rupiah, high inflation

Bank Indonesia (BI) has decided to maintain its benchmark interest rate, keeping vigilant about further risks in inflation and exchange rates.

The central bank’s board of governors announced on Thursday that it kept the rate at 7.5 percent, unchanged since March.

Both the deposit and lending facilities remained at the same position as well, standing at 5.5 percent and 8 percent, respectively.

BI spokesperson Tirta Segara said that the central bank kept its hawkish stance as several factors that might influence inflation had emerged.

“We continue to monitor the development of global oil prices, exchange rates, the adjustment of administered prices, Ramadhan and Idul Fitri and the possibility of El Niño occurring that could create volatility in food prices,” he told reporters in a briefing.

The consumer prices index (CPI) rose to 7.2 percent in May on an annual basis, even before Ramadhan and Idul Fitri festivities began, which normally mark the peak of consumption in the domestic consumption-driven economy. That is well above the central bank’s 3-5 percent target this year.

Tirta also attributed BI’s stance to persisting global economic uncertainties, especially the lack of clarity on when the US Federal Reserve would raise its policy rate and the ongoing slowdown in China — all of which had made investors risk averse, prompting selling of emerging assets, including rupiah assets.

The rupiah slumped about 7 percent so far this year to become the worst performer among major Asian currencies, according to Bloomberg.

However, BI has not made any changes to the last economic outlook despite the lingering woes and the recent growth target revisions made by the International Monetary Fund (IMF) and World Bank.

BI’s own forecast is set at 5.0-5.4 percent, while the IMF and World Bank have cut down their estimates to 4.7 percent from 5.2 percent.

“Growth in the second quarter will still be limited, but we believe it will improve in the coming quarters,” Tirta said.

The central bank hopes to see its revised regulation on the loan-to-value (LTV) ratio introduced next week, helping to trigger more economic activity in property and automotive sectors. The regulation will set lower down payment requirements on property and automotive purchases, thus boosting domestic consumption.

To many, BI’s announcement did not come as a surprise.

United Overseas Bank (UOB) economist Ho Woei Chen wrote in a research note that the result was in line with its expectation and that it believed BI now had little room to cut its interest rates.

“Against the backdrop of rate normalization expectations in the US later this year and the depreciation pressure on the IDR [Indonesian rupiah], we expect BI to maintain its policy rate unchanged at 7.5 percent for the upcoming meetings,” she said.

Capital Economics Asia economist Gareth Leather said that it had estimated no change either for Thursday’s announcement. However, he said that some gradual easing was possible by the end of the year.

“With the economy so weak, BI would ideally like to be supporting growth by loosening monetary policy. The problem is that inflation was running at 7.2 percent year-on-year in May, well above BI’s 3-5 percent target for this year, and the central bank is unlikely to want to damage its credibility by cutting rates just yet,” he said.

 

Source: The Jakarta Post

June 20, 2015

 

Bank Indonesia (BI) has decided to maintain its benchmark interest rate, keeping vigilant about further risks in inflation and exchange rates.

The central bank’s board of governors announced on Thursday that it kept the rate at 7.5 percent, unchanged since March.

Both the deposit and lending facilities remained at the same position as well, standing at 5.5 percent and 8 percent, respectively.

BI spokesperson Tirta Segara said that the central bank kept its hawkish stance as several factors that might influence inflation had emerged.

“We continue to monitor the development of global oil prices, exchange rates, the adjustment of administered prices, Ramadhan and Idul Fitri and the possibility of El Niño occurring that could create volatility in food prices,” he told reporters in a briefing.

The consumer prices index (CPI) rose to 7.2 percent in May on an annual basis, even before Ramadhan and Idul Fitri festivities began, which normally mark the peak of consumption in the domestic consumption-driven economy. That is well above the central bank’s 3-5 percent target this year.

Tirta also attributed BI’s stance to persisting global economic uncertainties, especially the lack of clarity on when the US Federal Reserve would raise its policy rate and the ongoing slowdown in China — all of which had made investors risk averse, prompting selling of emerging assets, including rupiah assets.

The rupiah slumped about 7 percent so far this year to become the worst performer among major Asian currencies, according to Bloomberg.

However, BI has not made any changes to the last economic outlook despite the lingering woes and the recent growth target revisions made by the International Monetary Fund (IMF) and World Bank.

BI’s own forecast is set at 5.0-5.4 percent, while the IMF and World Bank have cut down their estimates to 4.7 percent from 5.2 percent.

“Growth in the second quarter will still be limited, but we believe it will improve in the coming quarters,” Tirta said.

The central bank hopes to see its revised regulation on the loan-to-value (LTV) ratio introduced next week, helping to trigger more economic activity in property and automotive sectors. The regulation will set lower down payment requirements on property and automotive purchases, thus boosting domestic consumption.

To many, BI’s announcement did not come as a surprise.

United Overseas Bank (UOB) economist Ho Woei Chen wrote in a research note that the result was in line with its expectation and that it believed BI now had little room to cut its interest rates.

“Against the backdrop of rate normalization expectations in the US later this year and the depreciation pressure on the IDR [Indonesian rupiah], we expect BI to maintain its policy rate unchanged at 7.5 percent for the upcoming meetings,” she said.

Capital Economics Asia economist Gareth Leather said that it had estimated no change either for Thursday’s announcement. However, he said that some gradual easing was possible by the end of the year.

“With the economy so weak, BI would ideally like to be supporting growth by loosening monetary policy. The problem is that inflation was running at 7.2 percent year-on-year in May, well above BI’s 3-5 percent target for this year, and the central bank is unlikely to want to damage its credibility by cutting rates just yet,” he said. - See more at: http://www.thejakartapost.com/news/2015/06/19/bi-keeps-rate-steady-with-weak-rupiah-high-inflation.html#sthash.oQFoDdqI.dpuf

 
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