No Rate Change This Month from Bank Indonesia

May 12, 2011

Bank Indonesia continues to err on the side of monetary accommodation, placing it on the looser end of the spectrum of Asian monetary policies.  Officials meet each month to set their key reference rate, by over the past twenty-one months, they have tightened just once, that being a 25-basis point increase to 6.75% on February 4 of this year.  During the Great Recession, the rate was cut in nine consecutive months from December 2008 through August 2009 by a total of 300 basis points to 6.5%.

A statement posted today on the central bank’s web site observes continuing robust economic growth led by exports and investment and, despite a drop of on-year total CPI inflation to 6.2% last month from 6.7% in March and 6.8%, notes an uptrend in core inflation and warns that “Bank Indonesia will closely monitor a number of risks that may accelerate inflation pressures, including those related to high international commodity prices, accelerating domestic demand, the availability of foods supply, as well as the Government policy towards fuel subsidy.”  The reference interest rate is only 50 basis points above total inflation, which exceeds the central bank’s 6.0% target ceiling.  Real Indonesian GDP is expected to expand 6.0-6.5% this year.  One possible deterrent to being more aggressive in raising rates is the strong rupiah, which could be lifted further if the central bank acted faster. 

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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