B

ank Indonesia (BI) will maintain its interest rate this week on account of the country'€™s improving macroeconomic indicators, though the central bank is expected to maintain a hawkish stance amid threats of capital reversal in the region, analysts have said.

Six members of BI'€™s board of governors will hold a monthly monetary meeting on Thursday to decide further adjustment in the key interest rate, which has remained at 7.5 percent since November.

There is a likelihood of less than 10 percent that the BI rate will increase this week, according to the '€œBI probability model'€ developed by US-based Goldman Sachs.

The financial model predicted the possible BI rate adjustment based on the latest developments in the rupiah, trade balance and inflation, with Indonesia recently recording positive news in all three macroeconomic indicators.

The country posted a US$1.5 billion trade surplus in December, while the rupiah became Asia'€™s best performing currency last month. Meanwhile, BI Senior Deputy Governor Mirza Adityaswara has described last month'€™s inflation of 1.07 percent as '€œnormal'€, hinting that further tightening might be unlikely.

'€œWe also believe slowing private consumption growth and the downtrend in credit growth will render BI comfortable in holding rates unchanged at next week'€™s policy meeting,'€ said Enrico Tanuwidjaja, a Singapore-based economist with Nomura, on Feb.6.

BI increased its key interest rate by 175 basis points last year to put brakes on the growth of household consumption, imports and banking lending '€” all of which have expanded too fast, consequently weighing on the current-account deficit.

Indonesia posted gross domestic product (GDP) growth of 5.7 percent in the fourth quarter, with household consumption growth '€” which previously defied interest-rate hikes and stood stubbornly strong '€” cooling to 5.1 percent, compared to 5.5 percent in the previous quarter.

Meanwhile, BI has predicted that the current-account deficit, the major worry among foreign investors, will narrow to around 2 percent of the GDP in the fourth quarter, compared to the historic-high level of 4.4 percent (equivalent to $9.8 billion) that Indonesia posted in the second quarter.

BI also saw an increase in its foreign exchange (forex) reserves, which had risen $5 billion in the last four months to touch $100.6 billion by the end of January.

An increase in forex reserves means that BI has more ammunition to stabilize the rupiah without having to increase its key interest rate '€” the latter strategy could lure foreign inflows that prop up the currency, but would prompt an across-the-board slowdown in the economy.

The central bank has reaffirmed its hawkish stance by stating its commitment to prolonging the tightening cycle. BI Governor Agus Martowardojo told reporters last week that he '€œwould not hesitate'€ to make an upward adjustment to the interest rate.

'€œThe rupiah is not yet stable, so cutting the BI rate at a time when the financial market is still overwhelmed by uncertainty would spark outflows,'€ warned Lana Soelistianingsih, an economist with PT Samuel Aset Manajemen.

She predicted that BI would hike its interest rate by 25 basis points in the fourth quarter, when the US central bank might send the first signal of hiking its benchmark US Federal Reserve funds rate, a situation that might trigger capital reversal from emerging markets back to developed countries.