Bank Indonesia Stands Pat on Policy Rate
Dion Bisara | December 11, 2012
Bank Indonesia kept its policy interest rate unchanged at a record low 5.75 percent for a 10th consecutive month on Tuesday, citing inflation remaining within its targeted range.
While the central bank holding the benchmark rate was expected, it also refrained from raising its overnight Fasbi rate, defying expectations among some economists hoping that doing so would boost the rupiah.
“The rate is consistent with the current low and manageable inflation,” Dody Budi Waluyo, a Bank Indonesia spokesman, said in a statement on Tuesday. Inflation eased to 4.3 percent in November, from 4.6 percent in October. Bank Indonesia forecast inflation at between 3.5 percent and 5.5 percent this year and next. It expects inflation to be below 4.5 percent for 2012.
The central bank said the rupiah had been moving in line with market conditions but with “decreasing depreciation intensity,” and so it left the Fasbi rate — an overnight deposit facility provided by Bank Indonesia for commercial banks to manage their liquidity — unchanged. The Fasbi rose by 25 basis points to 4 percent in August, to mitigate risk of an overheating economy.
The currency rose 0.1 percent to 9,648 to the US dollar on Tuesday, ending a decline since Dec. 4, when a report of a record trade deficit for October was released.
Euben Paracuelles, an economist at Nomura Singapore, said that by keeping the benchmark and Fasbi steady, Bank Indonesia showed it was seeking “to support credit growth in investment and working capital as this is seen as enhancing productive capacity and hence promoting non-inflationary growth.”
Gundy Cahyadi, an economist at OCBC Bank in Singapore, said the central bank would need to “normalize” monetary policy next year. He expects the central bank to raise its key interest rate to 6.25 percent in 2013, as inflation picks up due to strong demand and a possible fuel price increase.
“This would serve well to sustain confidence on policy credibility and anchor in inflationary expectations for a more sustainable growth path in the longer-term,” he said.