Bank Indonesia (BI) says it will not be lulled into a false sense of security by the latest positive news on inflation and the trade balance, with the central bank signaling that further interest rate hikes this year should not be completely ruled out
ank Indonesia (BI) says it will not be lulled into a false sense of security by the latest positive news on inflation and the trade balance, with the central bank signaling that further interest rate hikes this year should not be completely ruled out.
BI Governor Agus Martowardojo said the central bank 'will not become complacent' following this week's announcement that Indonesia posted 0.5 percent inflation in December and a US$777 million trade surplus in November ' the trade data came with a one-month lag. 'We must convey here that our monetary policy stance will remain tight,' he told reporters in his Jakarta office after Friday prayers.
The trade surplus, Agus argued, might not be completely sustainable as the trade balance could face strains again in the future, especially in the wake of the implementation of the ban on unprocessed ore exports scheduled to come into effect on Jan. 12.
His statements came just one week before the monthly board of governors' meeting scheduled for Jan. 9, with many economists expecting BI to keep its key interest rate unchanged at 7.5 percent after the better-than-expected trade and inflation data.
Agus, however, signaled the need to raise the BI rate further to lure more capital inflows. He expressed worries about the upward trend of interest rates in developed nations, a situation that would make US or European assets more attractive, ultimately sucking up funds currently being invested in emerging markets such as Indonesia.
This week, the yield on US 10-year government bonds ' viewed as a bellwether for interest rates globally ' soared to a two-year high of 3.05 percent. 'If there's an increase in interest rates globally, it will really affect Indonesia,' Agus warned, saying that BI would implement action to sustain capital inflows.
Since being elected last May, Agus has transformed the once pro-growth BI into a hawkish central bank, as he lifted the BI rate from its historic low level of 5.75 percent, to the current 7.5 percent ' the highest level in almost four years.
The last time BI hiked the key rate, in November, the central bank put the term 'current-account deficit' ahead of 'inflation' in its official statement released after the meeting, in a hint that the tightening was aimed at curbing the deficit, rather than controlling inflation.
Economists say November's trade surplus might lead to only a slight improvement in the current-account deficit, the broadest measurement of international trade, which is the benchmark of economic sustainability.
In the fourth quarter, the current-account deficit will narrow only to 3.7 percent of gross domestic product (GDP), from 3.8 percent, or equivalent to $8.4 billion, a quarter earlier, according to US-based Goldman Sachs.
'The combination of domestic oil production shortfalls in 2014, signs that China's 'mini upswing' may be fading [...] indicate the sustainability of improvements in the trade balance remain questionable, and that the current-account deficit could stay stubbornly wide,' Philip McNicholas, an economist with BNP Paribas in Hong Kong, wrote on Friday in an email interview.
While BI hinted at undertaking another round of monetary tightening, the next interest rate hike may not come next week as the latest economic data 'will allow room' for BI to hold the rates, according to Aldian Taloputra, a Jakarta-based economist with state-run Mandiri Sekuritas.
'However, we still see some risks in the current-account deficit on the back of the government's ore export ban and the persistent deficit in the oil and gas trade,' he said on Friday. 'The likelihood of BI increasing its policy rate is still high in 2014.'
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