Thursday, September 12, 2013

Indonesia raises rate 25 bps, 4th hike this year

    Indonesia's central bank raised its benchmark BI rate by 25 basis points to 7.25 percent, it's fourth rate rise this year, and revised downward its growth forecasts for this year and 2014 while taking note of lower inflationary pressures in August.
    In addition to the BI rate, Bank Indonesia (BI) also raised the rate on its standing facility by 25 basis points to 7.25 percent and the rate on its deposit facility to 5.50 percent from 5.25 percent.
    "The action forms part of the follow-up measures taken to reinforce the policy mix instituted by Bank Indonesia, which focuses on controlling inflation, stabilising the rupiah exchange rate and ensuring the current account deficit is managed to a sustainable level," the central bank said.
    The central bank has now raised rates by 150 basis points this year to help stem the pressure on the rupiah exchange rate and the BI said it would continue to stabilise the currency, underpinned by efforts to strengthen monetary operations and deepen the foreign exchange market.
    "Bank Indonesia is of the opinion that the aforementioned policies, accompanied by the array of policies implemented previously, will expedite reductions in the current account deficit and bring the rate of inflation down to its target corridor of 4.5 percent, plus/minus 1 percentage point, in 2014," the central bank said.

    Last month the BI signed a $12 billion swap agreement with the Bank of Japan to bolster its defenses and on Monday the finance minister said Indonesia was seeking further bilateral swap agreements that would allow it to access more than $30 billion from new and existing swap lines. A government official also said Indonesia may extend a 2009 swap agreement with China.
      "Bank Indonesia predicts that the global economic slowdown and financial uncertainty will persist," the bank said, due to "lukewarm growth" in emerging markets, especially India and China.
     The central bank cut its 2013 growth forecast to 5.5-5.9 percent from a previous forecast of 5.8-6.2 percent, and the 2014 growth forecast to 5.8-6.2 percent from a previous 6.0-6.4 percent due to the weaker global economic outlook.
    The country's balance of payments is forecast to improve after a large trade deficit in July from large-scale imports of oil and gas during the religious holidays boosted the current account deficit. But the current account deficit should fall as these imports normalize, domestic demand weakens and other import-limiting policies take effect.
   The central bank said the private foreign debt position was viewed as "relatively sound" and foreign exchange reserves at the end of August were US$ 93.0 billion, stable from July's $92.7 billion.
    Indonesia's rupiah depreciated gradually through the first months of the year and then started to drop sharply in early July.
    "Up to the end of August 2013, dogged pressures on the rupiah persisted," the BI said, noting that the rupiah closed at 10,920 to the U.S. dollar, down 5.8 percent from the end of July and 11.7 percent compared with the end of 2012. During September the rupiah continued to fall, quoted at 11,350 - 11,515 per dollar on Sept. 11.
    "Bank Indonesia will continue to run the necessary means to stabilize the rupiah exchange rate," the BI said.
    Inflationary pressures eased in August, with prices up 1.12 percent in August, for an annual rate of 8.79 percent, compared with a monthly rise of 3.29 percent in July, for annual inflation of 8.61 percent.
     "Bank Indonesia expects inflationary pressures to continue to dissipate, with a low level of inflation predicted in September 2013," the BI said.
    The BI forecasts average inflation this year in a range of 9.0-9.8 percent and then ease to its target range in 2014.
   In the second quarter, Indonesia's Gross Domestic Product rose by 2.61 percent for annual growth of 5.81 percent, the lowest rate since the third quarter of 2011, and down from 6.03 percent in the first quarter.
    On Wednesday the central bank's deputy governor told Reuters that inflation would ease significantly in September following a spike after an average 33 percent increase in fuel prices at the end of June.


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