BI Keeps Rate Unchanged to Shore Up Economic Growth
Tito Summa Siahaan | April 12, 2012
Bank Indonesia kept its benchmark interest rate unchanged for the second consecutive month on Thursday as it seeks to shore up economic growth even as inflation concerns persist.
The board of governors of the central bank decided on Thursday to hold the policy rate at 5.75 percent, the lowest since it was introduced in July 2005.
BI Governor Darmin Nasution said the rate was still consistent with inflationary pressure into the future.
“We see that Indonesia’s current inflation is still under control, but we would apply necessary measures to anticipate temporary inflation pressure in regard to the possible subsidized fuel price increase,” Darmin said at the central bank building on Thursday.
Indonesia’s inflation accelerated for the first time in seven months in March. Consumer prices in the country rose 3.97 percent last month from a year earlier, compared with a 3.56 percent gain in February, the Central Bureau of Statistics (BPS) said earlier this month.
Core inflation eased to 4.25 percent, compared to 4.31 percent in February.
BI forecast inflation at 4.4 percent this year, within its target range of between 3.5 percent and 5.5 percent.
“If the subsidized fuel price is increased then inflation could accelerate to around 6.8 percent to 7.1 percent, depending on what scheme the government [opts for] and on the timing,” said Darmin, who was installed as central bank chief in May 2010.
The House of Representatives rejected the government’s proposal to raise subsidized fuel on March 31. Instead it agreed to raise the price of low-octane gasoline only if the six-month average price of Indonesian crude oil is above $120 per barrel.
The central bank held its economic growth forecast this year at 6.3 percent, at the lower end of the target range of between 6.3 percent and 6.7 percent, on the back of strong domestic demand and higher investment. Next year, the economy is forecast to expand between 6.4 percent and 6.8 percent and inflation by between 3.5 percent and 5.5 percent.
Indonesia’s $813 billion economy expanded 6.5 percent last year, the fastest pace since 1996 on growing private consumption, which accounted for 56 percent of economic activity last year.
Several economists in Jakarta said that the central bank move was in line with expectations.
“By taking into account the possibility of a fuel price hike, the best policy for now is wait and see,” said David Sumual, an economist at Bank Central Asia.
Economists, however, warned that uncertainty over the government’s fuel policy in the coming months would build up inflation expectations, which in turn will limit the scope for the central bank to loosen its monetary policy.
Gundi Cahyadi, an economist at OCBC Bank in Singapore, said that the central bank will continue to watch rising inflationary pressures going forward.
“We take this as a possible hint that BI will not stay quiet if inflation were to go up,” Gundi said.
Anton Gunawan, a Bank Danamon economist, said he thought the central bank might keep its policy rate unchanged throughout the year.
“Should the government raise the fuel price, BI may still keep the policy rate unchanged, and prefer to give tightening signal through other monetary instruments, which is most likely the reserve requirement ratio,” he added.