BI likely to hold rate at record low amid rupiah volatility

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(Kontan/Fransiskus Simbolon)

Bank Indonesia (BI) will likely keep benchmark interest rates at the record-low 5.75 percent at Thursday’s policy meeting as it seeks to strike a balance between slowing exports and rupiah volatility.

All economists in Reuters and Bloomberg polls expected the central bank to hold rates steady, with many forecasting the policy stance to last until the end of this year. The central bank uses its monetary policy tool — a benchmark for lending rates of banks and debt papers — to control the country’s money
circulation.

“If BI cuts the rate, it’ll be dangerous for the rupiah,” Standard Chartered Bank Indonesia economist Eric Sugandi told The Jakarta Post on Wednesday. A lower benchmark rate would mean lower returns for investors, affecting the attractiveness of investing in Indonesia.

The rupiah has weakened against the dollar by more than 4 percent so far this year, the second-worst performing currency in Asia, to Rp 9,455 as of 9:30 a.m. Jakarta time Wednesday, according to prices from local banks compiled by Bloomberg.

“On the other hand, inflationary pressures are high due to the new academic year in July and Ramadhan in August,” Eric added, echoing BI’s policy dilemma.

Indonesia’s broad money supply in May rose 20.9 percent to Rp 2,992.06 trillion (US$317.158 billion) from a year ago, reflecting a 2.2 percent increase on a monthly basis, according to BI data.

BI could use other tools than just the BI rate to absorb money in circulation and keep inflation in check, analysts have said, citing increasing interest rates applied to idle money that commercial banks leave with the central bank.

Consumer prices will be picking up in July and August due to the new academic year, Ramadhan and the Idul Fitri celebrations. Inflation quickened in June to 4.53 percent compared with a year earlier, though it’s still within the central bank’s target range of between 3.5 and 5.5 percent this year.

Bank Danamon economists Anton Hendranata and Dian Ayu Yustina said BI would have its eyes more on the current pressure on the rupiah. With the trade balance recording a deficit for the second consecutive month, there would be greater pressure on current account deficits in the second quarter of the year, they added.

“Higher deficits may cause further strains on the foreign exchange supply in the market. BI will need to stay on guard, maintain the foreign exchange market liquidity as well as communication over policies taken in addressing the weakening rupiah amid global uncertainties,” Anton and Dian Ayu wrote in a recent research note.

Southeast Asia’s largest economy is more than 50 percent controlled by domestic consumption and over 30 percent by investment. The economy grew 6.3 percent in the first quarter from the same quarter a year earlier, compared with the government’s 6.5 percent target.

Banks’ credit growth increased to 28 percent in the first six months of this year compared with 24.5 percent at the end of last year, but BI governor Darmin Nasution brushed off concerns of overheating, calling it productive growth.

“If investment is high, loan growth will also be high. Investment growth in 2012 has been high,” Darmin told reporters recently.

Realized foreign investment in Indonesia rose by 30 percent to Rp 51.5 trillion in the first quarter compared to the same period last year, the highest ever recorded for any quarter in Indonesia’s history.

High investment growth has been forecast to offset export slowdown in support of Indonesia’s economic growth this year.

Earlier in April, when banks’ overall loan growth was at 25.7 percent from the same month last year, investment credit accelerated the fastest at 28.8 percent, while working capital and consumer loans grew 27.7 and 20.5 percent, respectively.