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Jakarta Post

BI retains tight-bias stance despite slowdown

Bank Indonesia (BI) held its key interest rate unchanged at 7

Satria Sambijantoro (The Jakarta Post)
Jakarta
Fri, May 9, 2014

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BI retains tight-bias stance despite slowdown

B

ank Indonesia (BI) held its key interest rate unchanged at 7.5 percent on Thursday as pressure on the country'€™s external account outweighed the need to accelerate Indonesia'€™s slowing economy.

The nation'€™s economic growth slowed to 5.2 percent in the first quarter from 5.7 percent a quarter earlier, making a case for the central bank to shave its gross domestic product (GDP) growth target to between 5.1 and 5.5 percent, from the previous 5.5 to 5.9 percent.

However, BI Deputy Governor Perry Warjiyo said there was no undue need to worry about the slowdown as it was caused mostly by external factors, which had hurt the country'€™s exports, rather than signaling any deterioration in Indonesia'€™s domestic fundamentals.

'€œDomestic demand and investments are still growing quite strongly,'€ Perry said. '€œThis shows that [the slowdown] has not been caused by an overly tight monetary policy.'€

BI embarked last year on the country'€™s most aggressive tightening cycle in the past eight years, as it added 175 basis points to its key interest rate to combat soaring inflation, current-account deficit and rupiah depreciation.

'€œThe brunt of the tightening is likely to be felt in the economy in the second quarter when we expect growth to slow to 5 percent,'€ Barclays economist Wai Ho Leong and currency strategist Hamish Pepper wrote in a research note after the rate announcement.

BI Governor Agus Martowardojo predicted that the current-account deficit '€” the major worry among investors '€” would stand at US$4.1 billion in the January-March period, equivalent to 2.06 percent of GDP and relatively the same level compared to the previous quarter.

'€œWith BI'€™s focus remaining on current-account management, we believe the bias will ensure that [the rupiah'€™s true effective exchange rate] continues to bolster export competitiveness and a trade surplus,'€ the Barclays economists said.

The rupiah rose slightly after the central bank reiterated its commitment to continue leaning toward a tight-bias monetary policy, a stance that would support the currency. The rupiah gained 0.1 percent to close at 11,560 per US dollar in Jakarta on Thursday, rebounding from an earlier two-week low, according to Bloomberg.

Now there'€™s a growing consensus for the central bank to cut its key interest rate to support the decelerating economy, after BI'€™s rate of 7.5 percent, its highest level in four years, had remained unchanged for six months.

'€œThe sharper-than-expected slowdown has significant policy implications and will likely lead to policy makers abandoning further fiscal and monetary tightening,'€ said Nomura economist Lavanya Venkateswaran.

Indonesia'€™s economic growth, at an almost five-year low, fell far below policymakers'€™ expectations, with the government initially targeting a 6 percent increase in GDP this year, as stated in the 2014 state budget.

In addition, Indonesia'€™s consumer price index (CPI) has been on a downward trajectory, with year-on-year inflation standing lower than the BI rate since March, providing a leeway for the central bank to hike its benchmark rate as the real interest rate in the economy has been positive for two consecutive months.

The CPI saw a 0.02 percent deflation in April, taking year-on-year inflation during the month to 7.25 percent, its lowest level in 10 months.

Esther Samboh contributed to this story.

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