Bank Indonesia

June 13, 2013

A day after raising the overnight deposit rate to 4.25% from 4.0%, officials at Indonesia’s central bank took the more significant step of also lifting the main Bank Indonesia Rate to 6.0% from 5.75%, its level since a 25-basis point cut in February 2012.  That reduction had been the third one in a span of four months totaling 100 basis points.  The last BI Rate increase before today’s was implemented in February 2011.

From a statement on the Bank Indonesia web site, one infers that the main triggers for today’s first tightening in three years were intensifying downward pressure on the rupiah last month and worsening expected inflation.  Even though consumer prices held virtually stable last month and slid to 5.47% in year-on-year terms, “Bank Indonesia observes rising inflation expectation in anticipating Government policy on fuel subsidy. Administered prices are rising, triggered by second-phase of electricity tariff hike and distruption on the supply of LPG.”  Elsewhere, recent growth has been at the low end of expectations, the banking system is performing well, and the balance of payments is projected to improve.  The statement on future policymaking speaks in vague terms with no strong hint of the timing or directionality of the next change.  Presumably indicators of expected inflation and the performance of the rupiah will remain paramount factors.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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