January 10, 2013 / 7:43 AM / in 5 years

UPDATE 1-Indonesia cbank holds rate, says inflation manageable

JAKARTA, Jan 10 (Reuters) - Indonesia’s central bank kept its benchmark policy rate unchanged as expected on Thursday, at a record low of 5.75 percent for the 12th month, with inflation relatively mild and domestic growth still looking strong despite global weakness.

All 17 economists polled by Reuters had expected the policy rate to be kept steady to support Southeast Asia’s largest economy as it faces current account and trade deficits, which are adding fresh pressure to the already weakened rupiah.

The central bank said it remained vigilant on the current account deficit, but saw its policy rate as consistent with inflation that it sees as manageable at between 3.5 percent and 5.5 percent in the next two years.

Ten economists forecast the policy rate would be kept unchanged until after the first half of the year.

“BI has been widely expected to continue holding a cautious stance on monetary policy ... We continue to think that there is a good chance of seeing BI reversing some of its policy rate cuts this year, as we remain of the view that inflation may overshoot the official target,” said Gundy Cahyadi, economist at OCBC in Singapore.

WEAKENING RUPIAH

The statistics bureau last week announced that December annual inflation edged down to 4.3 percent, from 4.32 percent a month earlier, well within Bank Indonesia’s target range.

But in spite of benign inflation and solid domestic growth, trade figures in November remained poor in tandem with weak demand from major trading partners.

The rupiah, which fell over 6 percent last year to be emerging Asia’s worst performing currency, has extended losses this year.

Fears of capital outflows hit the unit again on Thursday.

The rupiah spot’s indicative prices slid 0.5 percent to 9,700 per dollar on exchange pages, down 0.7 percent this year, but its real price was softer with 9,850-9,870 traded, dealers said.

One-month dollar/rupiah rose 0.6 percent to 9,930, its highest since September 2009.

Some economists polled prior to the board of governors’ meeting expected BI to start hiking the deposit facility rate, or FASBI, in the first half of the year to help shore up the rupiah.

The central bank made no mention of the rate in its policy announcement. It said its policy focus was to manage external imbalances and to maintain the exchange rate.

Finance Minister Agus Martowardojo said trade imbalances have put the current account at $21.5 billion in deficit last year.

While the economy showed resilience in the face of the global downturn last year, recent economic data indicate Indonesian consumers are growing less confident due to concerns over jobs and wages. Retail sales grew at a slower pace in November despite discounting by stores ahead of the holiday season.

Manufacturing activity expanded at a slower rate in December, as growth in export orders declined from a month earlier, an HSBC Markit survey showed. (Additional reporting by Adriana Nina Kusuma and Andjarsari Paramaditha; Editing by Neil Chatterjee and Kim Coghill)

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