A Continuing Pause in Indonesian Monetary Tightening…

February 13, 2014

And some analysts are starting to wonder if further restraint will even be necessary.  Three 25-basis point hikes of the BI Rate and two of 50 basis points apiece between June and November of 2013 raised the level from 5.75% to its current level of 7.5%.  In response, the rupiah has shown recent stability after getting hammered in 2013, and the current account deficit-to-GDP ratio has been more than halved to 2.0%.  Although CPI inflation slowed in the first month of 2014, the 12-month increase of 8.2% is almost twice as high as the 3.5-5.5% target midpoint.  Bank Indonesia’s Board issued a statement that spoke also of better balanced and greater-than-expected growth last quarter and of the resilience of Indonesian banks.  For now, core inflation lies in target, but when such a wide gap exists between total and core, the risk of the former infecting the latter cannot be ignored.  The statement pledges that “Bank Indonesia will remain vigilant of inflationary pressures and risks looking ahead, including disruptions to the supply of food, electricity rate hikes and the impact of rupiah depreciation.”  As an early warning system, the exchange rate likely offers the best gauge of whether the 175 basis points of rate tightening done last year will be good enough to achieve more balanced growth, a sustainable balance of payments, and the gradual reduction of total inflation that monetary officials seek.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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