Reuters logo
UPDATE 1-Indonesia c.bank keeps rates on hold, inflation seen a risk
July 14, 2015 / 10:04 AM / 2 years ago

UPDATE 1-Indonesia c.bank keeps rates on hold, inflation seen a risk

(Adds details, comments)

* Key rate left at 7.5 pct, as expected in Reuters poll

* BI says rates in line with efforts to manage inflation targets

* C.bank sees inflation cooling later in the year

By Nilufar Rizki and Gayatri Suroyo

JAKARTA, July 14 (Reuters) - Indonesia’s central bank kept its key reference rate on hold on Tuesday, resisting loosening policy to bolster an economy growing at its weakest pace since the global financial crisis.

Bank Indonesia (BI) said interest rates were in line with its inflation targets for this year and next.

Southeast Asia’s largest economy is wrestling with weak exports and consumption but a frail rupiah and rising inflation has limited the central bank’s options to cut rates to spur growth, which in the first quarter was the weakest since 2009.

As widely expected, the central bank kept the benchmark interest rate at 7.50 percent, unchanged for a fifth meeting in a row.

“The main constraint on policy loosening at the moment is high inflation,” said Gareth Leather, Asia Economist with London-based Capital Economics. “We think the central bank will wait until later in the year, when inflation is set to drop sharply as the impact of last year’s fuel subsidy falls out of the annual comparison, before it cuts rates.”

Annual headline inflation in June picked up to to 7.26 percent from 7.15 percent, the highest this year, but BI said on Tuesday it was still confident inflation would cool to its target range of between 3 to 5 percent this year.

BI last cut the benchmark rate by 25 basis points in February, unwinding a surprise rate hike it made in November 2014. On Tuesday, it also held its overnight deposit and lending facility rates at 5.5 percent and 8.0 percent.

GROWTH TO PICK UP

The central bank’s decision comes two weeks ahead of second quarter economic growth figures.

BI said it supported the government’s effort to accelerate infrastructure spending. The realisation of these projects will push up growth starting in the third quarter, but growth in April-June is expected to remain “limited”, it said.

Sluggish growth could prompt a rate cut later in the year.

“The earliest chance of a rate cut will be towards the end of the year - on two big conditions of an orderly Fed exit and also lower domestic inflation,” Wellian Wiranto, economist at OCBC bank, said.

While the rupiah’s relative weakness remains a constraint for future rate cuts, DBS economist Gundy Cahyadi feels BI may continue to prop up the fragile rupiah.

The rupiah has been broadly stable since June, trading around 13,300 per dollar, although it is still the second-worst performing in emerging Asia after Malaysia’s ringgit. It barely moved after the rate announcement.

BI has lost about $7.5 billion of its foreign exchange reserves from February to June, partly to defend the rupiah. (Additional reporting by Hidayat Setiaji; Editing by Jacqueline Wong)

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below