Indonesia Gets Fifth Central Bank Interest Rate Hike Since June

November 12, 2013

The Board of Governors of Bank Indonesia hiked the BI interest rate to 7.5% from 7.25% in a move that surprised many analysts.  This increased followed hikes of 25 basis points in June, 50 bps in July and August, 25 bps in September but no change in October.  The key interest rate has thus climbed in the space of five months from 5.75% to 7.50%.  A released statement said this latest tightening “was taken in order to ensure that the current account deficit is reduced to a more sound level and inflation in 2014 returns to around 4.5±1%, thereby supporting sustainable economic growth.”  The external deficit is running between 3.0% and 3.5% of GDP.  Consumer prices rose 8.3% in the year to October, thanks to a 3.6 percentage point lift from non-core items.  A 5.6% rise of real GDP in the year to 3Q13 constituted a four-year low, and growth next year is projected to straddle 6.0%.  The current account deficit exposes the rupiah to potential selling pressure especially on crescendos of speculation that the Fed will taper sooner, and both past and possible additional rupiah depreciation would lift import prices and thereby impede total inflation from dropping to target as soon as hoped.

Indonesia’s other central bank rates for the Lending Facility and Deposit Facility were also raised 25 bps to 7.5% and 5.75%.  The last BI Board meeting of 2013 is scheduled for December 12.

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

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