Bank of Indonesia Leaves Key Interest Rate at 6.5% But Drops a Clue of Concern

August 4, 2010

An unchanged central bank in Indonesia was as expected and perpetuates the stance that was reached in August 2009 following six cuts of 25 basis points and three reductions of 50 bps from a peak of 9.5% prior to December 2008.  Unlike some Asian central banks, the authorities at Bank Indonesia have given, up to now at least, greater priority to fostering growth than to containing inflation.  This has been possible in part because of the rupiah’s rise of more than 10% against the dollar during the past year.

The policy bias may soon change.  Today’s statement calls the 6.5% interest rate “adequate.”  Central banks that choose to signal true satisfaction with policy use the word “appropriate.”   Adequate conveys less confidence and greater watchfulness.  After the prior monthly meeting on July 5, officials had declared, “The Board of Governors believes that the BI Rate at this level is consistent with achievement of the 5%±1% inflation target in 2010 and 2011 and remains conducive to recovery in the domestic economy amid the persistently high level of global risks from the debt crisis in some European nations.”

In the month since that was written, the European sovereign debt crisis has simmered down a bit, and food price pressures  lifted the Indonesia CPI by 1.6% in July and to an above-target on-year pace of 6.2%.  Officials had not previously foreseen such a spike, and while it was primarily caused by seasonal forces, they are concerned that in conjunction with mandated electricity tariff hikes such could unhinge inflation expectations.  Soft economic growth is not an issue.  GDP expanded 5.7% in the year to 1Q10.  Officials have thus far limited any inclination to move away from a purely pro-growth policy to the tightening of liquidity management, but new wording in today’s statement suggests that an interest rate hike could occur sooner than thought previously if on-year inflation fails to move below the target range ceiling quickly.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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