Home / News / World /  Bank Indonesia holds key rate before Widodo fuel-price move

Jakarta/Singapore: Indonesia’s central bank kept benchmark borrowing costs unchanged in its first meeting since President Joko Widodo took office, refraining from tightening policy before the government raises fuel prices.

Bank Indonesia governor Agus Martowardojo and his board left the reference rate at 7.5%, the central bank said in Jakarta on Thursday, staying on hold for a 12th straight month following 1.75 percentage points of increases in 2013. The decision was predicted by 21 of 22 economists surveyed by Bloomberg News, with one forecasting a move to 7.75%.

The government of Widodo, known as Jokowi, has said it will act this month on his campaign pledge to cut energy subsidies that have strained the state budget and spurred a persistent current-account deficit. The central bank said on Thursday it will remain vigilant and take steps to manage the inflation effects of any fuel-price increase, while reporting an improvement in the broadest measure of trade.

“BI has handled monetary policy very ably, maintaining the tight bias through the soft growth patch to maintain inflation expectations," said Wai Ho Leong, a Singapore-based economist at Barclays Plc.

“We expect this tight bias to be maintained in the coming months, possibly fine tuned with another rate hike" in the first quarter if the planned fuel price adjustment in November turns out to be larger than expected, he said.

Deficit narrows

The Jakarta Composite Index of stocks closed little changed after the policy decision, erasing an earlier loss of as much as 0.4%. The rupiah was steady at 12,203 against the dollar as of 4:47pm in Jakarta.

Indonesia’s current-account deficit narrowed to $6.8 billion last quarter, or 3.07% of gross domestic product, from a revised $8.7 billion in the previous three months, data released by the central bank on Thursday showed.

The gap for 2014 will probably be about 3% of GDP, Bank Indonesia said. The current account will improve on exports, and the central bank will remain vigilant against the risk of volatile capital flows.

The monetary authority also kept the deposit facility rate unchanged at 5.75%.

“There’s really not much more room for them to hike further," Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc., said before today’s rate decision. “Unless we see a very substantial fuel-price hike, I think Bank Indonesia will probably stay where it is for a while."

Slowing growth

The government will raise fuel prices this month and hasn’t decided on the magnitude of the change, coordinating minister for economic affairs Sofyan Djalil said last week.

Jokowi, who inherited an economy growing at the slowest pace in five years, is seeking to free up fiscal space for infrastructure spending and support for the poor.

Gross domestic product rose 5.01% in the three months ended 30 September from a year earlier, the least since the same period in 2009, based on previously reported data compiled by Bloomberg. Inflation has cooled to 4.83% in October from 8.2% in January.

Inflation next year will range from 3% to 5%, and the current interest rate level is consistent with efforts to manage inflation, the central bank said on Thursday. Economic growth will be at the lower end of its forecast range this year, and reach 5.4% to 5.8% in 2015, it said.

“Bank Indonesia remains vigilant on indications on rising inflation expectations linked to the fuel subsidy policy planned by the government," it said. “Bank Indonesia will adopt a number of policies to ensure that the impact of the fuel-price hike towards inflation remains controlled and temporary, including by strengthening coordination with the central and local governments." Bloomberg

Manish Modi in New Delhi, Yumi Teso in Bangkok and Andrew Janes in Jakarta contributed to this story.

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