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BI benchmark rate unchanged amid polling euphoria
Bank Indonesia (BI) on Thursday kept its key interest rate steady and maintained its economic growth forecast, as the central bank gave no sign of loosening its monetary policy amid the recent rally of rupiah assets spurred by euphoria from the presidential election
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ank Indonesia (BI) on Thursday kept its key interest rate steady and maintained its economic growth forecast, as the central bank gave no sign of loosening its monetary policy amid the recent rally of rupiah assets spurred by euphoria from the presidential election.
BI's six-person board of governors, led by Agus Martowardojo, held the key interest rate at 7.5 percent, the same level as the last eight consecutive months, in a monetary meeting that took place one day after Indonesians cast their ballots.
The central bank kept its gross domestic product (GDP) growth target range of 5.1 to 5.5 percent unchanged. This occurred after BI deputy governor Perry Warjiyo said last week that the economy 'could go lower' than such a target range, citing weak external demand and low commodity prices that had exerted pressure on the country's exports.
Indonesia's GDP growth, though it already slowed to a four-year low of 5.2 percent in the first quarter of this year, remained 'quite solid', BI said in the statement released after the board of governors' meeting.
'Today's statement left us with the sense that the central bank may be somewhat underestimating the robustness of domestic demand,' said Lim Su Sian, an economist with HSBC Bank in Singapore.
'Recent indicators suggest that activity may be picking up again after a brief lull,' she continued. 'We believe BI needs to up its vigilance, and perhaps even its hawkishness, to demonstrate that it remains on top of the data and ahead of the curve.'
The current account deficit, the major worry among foreign investors in Indonesia, narrowed to US$4 billion (2 percent of GDP) in the first quarter of this year, but may soar to as much $9 billion in the second quarter, according to BI's estimates.
The prospect of further deterioration of Indonesia's external balance has prompted Société Générale to revise up its year-end rupiah forecast to 12,600 per dollar. The Paris-based bank was once the world's most bullish forecaster on the rupiah, as earlier this year it predicted that the currency would strengthen to 10,250 against the greenback.
On Thursday, the rupiah rallied 146 basis points, or 1.2 percent, to touch 11,549 per dollar, according to the Jakarta Interbank Spot Dollar Rate (JISDOR). The rupiah is Asia's best performer in July as it has strengthened 3.5 percent month-to-date on expectations that a presidential victory for Joko 'Jokowi' Widodo would encourage foreign inflows.
'With the budget deficit nudging up against the legally legislated limit of 3 percent of GDP, there are possible risks to rupiah stability from the ongoing Fed [US Federal Reserve] policy normalization and the renewed risk to oil prices,' cautioned Tushar Poddar, a Mumbai-based economist with Goldman Sachs.
While the consensus is to expect no change to the BI rate, Goldman Sachs predicted that the central bank would deliver another interest rate hike by the end of 2014 as it would need to protect the rupiah, Poddar said.
