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Jakarta Post

BI warns of backlash from interest rate cut

  • Satria Sambijantoro

    The Jakarta Post

Jakarta   /   Tue, August 4, 2015   /  04:14 pm

Despite the lower-than-usual inflation figures during the month of Ramadhan, Bank Indonesia (BI) has rejected the possibility of lowering interest rates in the near future, on the basis that a looser monetary policy would be counterproductive given the risks to the rupiah and abundant liquidity in the banking sector.

BI Deputy Governor Perry Warjiyo said on Monday that any monetary policy moves to spur growth should not be disruptive to Indonesia'€™s economic stability, asserting that a cut in interest rates would have an across-the-board effect on the domestic financial system.

'€œGiven the pressures on the rupiah, our room to lower interest rates will be limited,'€ he told reporters at BI'€™s headquarters on Monday.

Perry said that there was already an '€œexcessive'€ amount of liquidity in the banking sector, making a cut in interest rates '€” a policy designed to spur growth by boosting the circulation of money in the economy '€“ ineffective.

'€œWe have loosened [our monetary policy] through macroprudential channels, but demand is yet to increase due to the limited realization of the government'€™s capital expenditure spending,'€ the BI deputy governor noted.

The Central Statistics Agency (BPS) reported on Monday that inflation hit 0.93 percent in July, taking year-on-year inflation during the month to 7.26 percent.

The month-to-month inflation figure was lower than the historical standard during Ramadhan of around 1.1 percent, with BPS head Suryamin and his deputy Sasmito Hadi Wibowo both saying that BI might have room to cut its interest rates this year.

BI, which adopts an inflation-targeting monetary policy, has kept the benchmark interest rate unchanged at 7.5 percent since February. The central bank'€™s top executives will meet on Aug. 18 to decide whether any changes in the BI rate are necessary.

Bank of America Merrill Lynch economist Chua Hak Bin said that BI might not have a justifiable argument to defend a rate-cut this year given the elevated inflation prints, as well as renewed risks of capital outflows from the US Federal Reserve rate increase that could hurt the rupiah.

In February, the market did not respond well to BI'€™s surprise move to cut interest rates by 25 basis points, a decision that led to questions about the central bank'€™s commitment to preserve economic stability and safeguard the rupiah.

This year, the rupiah has fallen by around 8 percent, among the worst performers in Asia together with the Malaysian ringgit. Data from the Jakarta Interbank Spot Dollar Rate (JISDOR) showed the rupiah fell 0.1 percent to trade at 13,492 per US dollar on Monday.

'€œBank Indonesia is concerned about risks to the currency and potential capital outflows, given the looming Fed funds rate hikes,'€ Chua noted. '€œIndonesia remains vulnerable, with growth faltering, exports contracting and inflation elevated.'€

 Other analysts have also warned that the low inflation figure might mask the actual woes facing the Indonesian economy.

The July inflation rate of 7.26 percent was higher than the market'€™s initial estimates, with a Bloomberg survey of economists predicting price levels to surge by only 7.06 percent.

The uptick in inflation was driven by rising air and land transportation costs due to the large numbers of Indonesian citizens returning home for Idul Fitri, as well as the increase in prices for volatile food industries such as fish, chicken and beef.

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