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BI could stay put on key rate given inflation, trade data
Bank Indonesia (BI) might face a difficult trade-off in adjusting its benchmark rate in its board of governorsâ monthly meeting tomorrow, but analysts believe the central bank will keep the BI rate unchanged after recent inflation and trade balance data showed significant improvements
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ank Indonesia (BI) might face a difficult trade-off in adjusting its benchmark rate in its board of governors' monthly meeting tomorrow, but analysts believe the central bank will keep the BI rate unchanged after recent inflation and trade balance data showed significant improvements.
Last month, the central bank surprised the market by hiking the BI rate by 25 basis points to 7.5 percent, a move it said was necessary in pushing down the current account deficit and managing inflation.
'This time, there's no urgency to hike the BI rate,' said Juniman, the chief economist of privately owned Bank Internasional Indonesia (BII), noting economic data released this month showed an improvement in Indonesia's trade and inflation figures.
The statistics office reported last week that Indonesia's trade balance swung into an unexpected surplus of US$42 million in October, while monthly inflation remained relatively benign at 0.12 percent in November.
'The effectiveness of another BI rate hike is doubtful because the major factor behind the
current account deficit is the high imports of oil and gas, which might not be fully resolved through
an interest rate hike,' Juniman explained.
BI is currently among the most hawkish central banks in Asia, having lifted its key interest rate by a cumulative 175 basis points to 7.5 percent this year, as it attempted to stabilize the Indonesian economy that had been grappling with soaring inflation and a record-high current account deficit.
The BI rate hike in November was also seen as a pre-emptive measure to safeguard the rupiah, which normally faced pressure by the end of the year due to the high demand for dollars, combined with the prospect of the tapering of US quantitative easing, which would trigger capital outflows.
BI will only increase its key rate this week if the rupiah depreciates below 12,100 per dollar prior to Wednesday's monetary meeting, according to the 'BI probability model' developed by US-based Goldman Sachs.
The model predicts future adjustment in the BI rate based on developments in inflation, trade balance and the rupiah.
The rupiah on Tuesday weakened 29 basis points to trade at 11,985 against the greenback, according to the Jakarta Interbank Spot Dollar Rate (JISDOR)
'The current BI rate level has already been able to strengthen the rupiah back to Rp 11,500 per dollar by the end of this year, in line with the decreasing demand of dollars,' said Ryan Kiryanto, the chief economist of state-run Bank Negara Indonesia (BNI).
Last week, the President's National Economic Committee (KEN) warned that the central bank must be careful when hiking interest rates.
Any overdose in monetary tightening could lead to increasing pressure in the banking system, as well as potential overkill in economic growth.
BI executive director for monetary policy Dody Budi Waluyo defended the move to hike the benchmark rate, saying that any adjustment in the BI rate had always been 'the last resort'.
