B

ank Indonesia (BI) held its key interest rate steady for a fifth month amid growing concern over the escalation of risks in the global financial markets.

Despite the downward trend in the inflation rate, BI'€™s board of governors decided to keep the interest rate unchanged at 7.5 percent during their monthly meeting on Tuesday.

The central bank said that the monetary policy stance would be consistently directed to maintain macroeconomic stability.

The deposit facility rate (Fasbi) and the lending facility rate (Repo) were also maintained at 5.5 percent and 8 percent, respectively.

BI noted that inflationary pressures were lower than its estimates, as the 7.26 percent annual inflation recorded in June was lower than historical patterns during Ramadhan.

However, the major risks ahead might lie in the financial and currency markets, the central bank warned.

The rupiah fell by 1.3 percent alone in June, with the depreciation caused primarily by external factors, BI said in a statement.

The local currency has fallen by 7 percent this year, the second-worst performing Asian currency after the Malaysian ringgit.

After the rate hold decision, the rupiah fell 0.3 percent to 13,338 per US dollar as of 4.33 p.m. in Jakarta, according to Bloomberg exchange rates.

The central bank said it would remain vigilant over '€œelevated'€ risks in the global financial markets, driven by a looming interest rate hike in the US, the debt crisis in Greece and the stock market sell-off in China.

'€œTo be sure, using monetary policy to safeguard market sentiment comes with significant costs,'€ said Wellian Wiranto, an economist with OCBC Bank in Singapore.

On Indonesia'€™s recent growth slowdown, the central bank noted that it would support growth through accommodative macroprudential policies, as well as via stronger cooperation with the government to accelerate budget disbursements on regional levels.

BI noted that domestic growth was likely to remain subdued in the second quarter on the back of ebbing consumer confidence, as evinced by declining automotive and retail sales.

However, growth would pick up in the third quarter, the monetary authority has predicted.

In the January to March period, Indonesia'€™s gross domestic product (GDP) growth decelerated to 4.7 percent, the slowest level in five years. BI Senior Deputy Governor Mirza Adityaswara forecast recently that growth in the second quarter would be '€œslightly less'€ than the figure in the first quarter.

International financial agencies such as the International Monetary Fund (IMF) and the World Bank cut down their forecast for Indonesia'€™s GDP growth to 4.7 percent in June from their previous estimate of 5.2 percent. The Asian Development Bank (ADB) also cut last week its economic growth projection for Indonesia to 5 percent from 5.2 percent as the development budget spending slows amid subdued exports.

The slump in growth has put pressure on local financial markets, as equity prices fall on the back of fears that the slowdown would weigh on corporate earnings.

The Jakarta Composite Index has fallen 6.2 percent year-to-date, the worst performer among 13 Asia-Pacific stock market indices compiled by the Indonesian Stock Exchange.

'€œWe doubt there will be much of an impact from further rate cuts at this juncture,'€ commented Gundy Cahyadi, an economist from DBS Bank in Singapore.

'€œWe think that an aggressive fiscal policy is the key to prevent GDP growth from spiraling downwards from here onwards.'€