B

ank Indonesia (BI) may raise its benchmark rate during a board meeting next week amid growing concern for the nation’s rising inflation rate, according to the central bank’s chief.

Outgoing BI Governor Darmin Nasution told reporters in Jakarta on Friday that an increase in the policy rate would be inevitable if inflationary pressure continued. “It is not easy for Bank Indonesia to hike the policy rate. However, it is something that we cannot avoid doing when necessary.”

The statement signals possible monetary tightening for a central bank that has long maintained a pro-growth policy. BI has kept its policy rate at an historic low of 5.75 percent since February 2012, as well as retaining its overnight deposit facility rate (Fasbi) at 4 percent — 175 basis points below the BI rate, a spread that many analysts considered too wide — since August.

Inflation topped 5.9 percent in March, higher than BI’s target of 5.5 percent, a situation that has become a concern for the central bank, as it has driven up yields in the government bond market, according to Darmin.

The central bank will hold its monthly board of governors’ meeting on April 11 to decide on policy rate adjustments, which will be the first meeting attended by newly-appointed deputy governor Perry Warjiyo, known as a proponent of macro-prudential measures and a critic of swift adjustments of the policy rate.

Perry said last week that the central bank saw no need to adjust the BI benchmark rate at least until the end of this year.

With Perry joining BI’s decision-making board, analysts have stated that it would be unlikely that the central bank would make a policy rate adjustment very soon.

Darmin, meanwhile, said that any decision on increasing the benchmark rate would depend on the result of meetings with top government officials.

President Susilo Bambang Yudhoyono and his top economic ministers have been discussing implementing new policies to curb ballooning fuel subsidies by a limiting sales of subsidized fuel or increasing fuel prices.

Meanwhile, economists have been mulling the possible inflationary effects of any new government policy.

“We may see some adjustment in fuel prices, which will definitely lead to inflation above the current 5.5 percent target ceiling,” Gundy Cahyadi, an economist with OCBC Bank in Singapore, said on Friday in an email interview. “If BI stays away from a rate increase, this may trigger some policy risks in the market.”

Gundy said that he thought that the central bank would increase the benchmark rate by 50 basis points by the end of this year.

He said that monetary tightening would be useful not only to manage future inflationary pressure, but also to support the rupiah.

“Pressure on the rupiah remains persistent because of the weak current account position. This should be a top priority to look at in the coming months,” Gundy said.

The rupiah gained 0.1 percent to 9,738 per US dollar as of 5:04 p.m. in Jakarta, prices from local banks compiled by Bloomberg show. The currency fell 0.2 percent this week. The spot rate traded at a 0.5 percent premium to its one-month non-deliverable forwards, which strengthened 0.3 percent to 9,789.

A daily fixing used to settle derivatives was set at 9,756 by the Association of Banks in Singapore, from 9,752 yesterday and 9,719 on March 28.

The central bank has recently intensified its campaigns to protect the rupiah, with the central bank booking a US$7.6 billion decline in its foreign exchange (forex) reserves over the last two months to a two-year low of $105.2 billion at the end of February.

Darmin acknowledged that defending the rupiah would be more challenging going forward.

“The pressure in the financial sector is reflected in our currency, meaning that the depreciation pressure for the rupiah now is ‘higher than usual’,” Darmin said.