Bank Indonesia Officials Decline to Tighten Further

August 15, 2013

Benchmark interest rate hikes of 25 basis points in June and 50 bps in July reversed cuts administered in November 2011 and February 2012.  The present central bank rate level of 6.5% matches the level maintained until February 2011 in the wake of the Great Recession.

A further hike in the benchmark interest rate was not administered after this month’s policy board meeting.  A released statement projected improvement over coming months in the balance of payments and inflation while characterizing recent rupiah depreciation as appropriate and a constructive development.

The balance of payments is expected to rebound, buoyed by improvements in the current account in line with the impact of weaker domestic demand and corrections in the rupiah exchange rate. Bank Indonesia considers that future improvements in the performance of the current account will strengthen further over time and remain sustainable if supported by an array of policies to boost the competitiveness of exports and control excessive imports.

Inflationary pressures are presently expected to ease after the holy fasting month of Ramadan and the start of the new academic year, as well as due to slower domestic economic growth. Bank Indonesia believes that a downward inflation rate trend in the future will ensure that headline inflation in 2014 returns to the target corridor of 4.5%±1%.

Bank Indonesia expects the downward rupiah trend, which is still consistent with its fundamental conditions, to support efforts to expedite external rebalancing as well as to catalyse healthier economic growth.

The September interest rate policy statement will be released on the 12th.

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



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