BI holds rate, cautious on trade deficit
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Indonesia’s central bank held its benchmark interest rate on Thursday at the record-low 5.75 percent, as expected, citing concerns over a current account deficit that could hurt investors’ confidence in the country’s assets, including the rupiah.
Weaker exports, followed by rising imports due to higher domestic demand despite the global slowdown, have created a deficit in Indonesia’s trade balance for three straight months, and its current account also suffered a deficit for a second consecutive quarter.
“The current account deficit increased in the second quarter of 2012, but it is forecast to decline in the second half of the year,” Bank Indonesia (BI) announced in a policy statement after a monthly meeting attended by the five-member board of governors.
The central bank has vowed to improve the current account deficit to a “sustainable” level by ensuring a “stable” rupiah and working along with the government to manage domestic demand, which is a strong driver of Indonesia’s economy.
“It is crucial that the government and BI proactively maintain good communication to avoid a self-fulfilling negative expectation from developing in the market,” Bank Danamon’s chief economist, Anton Gunawan, said.
“A current account deficit of less than 3 percent of gross domestic product [GDP] is still sustainable for a country as large and import-dependent as Indonesia,” he added. Indonesia’s current account deficit reached 1.3 percent of the country’s GDP in the first quarter at US$2.9 billion.
Foreign investors sold off Indonesia’s assets on concerns that deteriorating exports would hurt the country’s overall economy. The rupiah is one of the worst performing currencies in Asia, having lost more than 4 percent so far this year, sliding to around Rp 9,470 against the US dollar on Thursday.
BI has been intervening in foreign exchange (forex) and government bond markets to stabilize the currency, using the country’s forex reserves, which topped $106.6 billion at the end of July, down about $3.5 billion from the start of this year.
Darmin Nasution, the central bank’s governor, said that selling pressures on the rupiah would ease in the year’s second half, forecasting that the currency would average between Rp 9,100 and Rp 9,300 per US dollar throughout this year, and averaging Rp 9,171 during the first half of 2013.
BI spokesman Dody Budi Waluyo said strong domestic factors would stabilize the rupiah, with Indonesia’s overall economy having grown 6.4 percent in the second quarter, after hovering around that level since 2010.
The central bank estimated economic growth to range between 6.1 percent and 6.5 percent this year on the back of strong consumption and investment, as reflected in nationwide banks’ 25.8 percent loan growth in June compared with a year ago.
To manage domestic demand, consumer prices will be maintained at an affordable level, with inflation expected to end the year at between 3.5 percent and 5.5 percent, after reaching 4.56 percent in June on a year-on-year basis, BI said.
“Inflationary pressures remain under control although slightly increased, influenced by seasonal factors, such as Ramadhan,” the central bank’s policy statement stated.
BI said the current policy rate level was consistent with the consumer price index (CPI) target, after cutting the rate by a total of 100 basis points from October to February to spur growth in the country amid weakening global conditions.
Like other economists, Prakitri Sofat, a Singapore-based economist with Barclays Capital, expected the benchmark interest rate to remain unchanged through 2012 due to strong economic growth and manageable inflation.
“We believe further easing by BI will also weigh on the rupiah. Rate cuts would appear slightly contradictory, given BI’s policy of tightening liquidity,” Sofat wrote in a note distributed after the policy announcement.