Bank Indonesia: Keeps Reference Interest Rate Steady at 6.0%

January 12, 2012

In this month’s statement, monetary officials asserted that a 6.0% key interest rate would promote economic growth of some 6.5% this quarter and 6.3-6.7% in 2012 yet also be consistent with the lowered inflation target of 3.5-5.5%.  Inflation in 2011 of 3.8% on average was slightly less than the 4-6% target range for that year.  Indonesian central bankers are also mindful of the need to foster a stable financial system given the weaker performance of the global economy and financial markets. 

The history of Indonesia’s key interest rate conforms to a familiar pattern.  From December 2008 to August 2009, nine consecutive reductions were implemented that cumulated to 300 basis points and left the key rate at 6.50% where it remained until a 25-bp rate hike in February 2004.  But unlike in many other Asian economies, that proved to be the sole tightening.  As global trends worsened and become more risk-prone, officials cut the reference rate by 25 basis points last October and doubled that reduction to 50 bps in November.  The fact that inflation in 2011 was nearly half the 7.0% rate of 2010 gave authorities leeway to do that.  They will need to watch the rupiah very carefully going forward, however.  While such rose on balance in 2011, the currency has dropped against the dollar by more than 6% since the rate cuts in the autumn.  That development and plans to end fuel subsidies may cause inflation this year to track a higher path than officials assume.  Future policy will hinge importantly on exactly how inflation, growth, and financial market conditions evolve.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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