Thursday, June 12, 2014

Indonesia holds rate, sees inflation hitting target

    Indonesia's central bank maintained its benchmark BI rate at 7.50 percent, as expected, and said the rebalancing process of the economy was progressing as expected and it would continue to take anticipatory measures to ensure that the inflation target can be met and the current account deficit is reduced to a more sustainable level.
    Bank Indonesia (BI) has held its rates steady since November 2013 after raising them by 175 basis points in 2013 in response to inflationary pressures.
    Indonesia's headline inflation rate rose slightly to 7.32 percent in May from 7.25 percent in April, but the central bank said it considered "the rate of inflation up to May 2014 as congruous with the achievement of the inflation target" in 2014 of 4.5 percent, plus/minus 1 percentage point, and the 2015 target of 4.0 percent, plus/minus 1 percentage point.
    BI said food prices experienced some deflation but at a lower intensity than in the previous month as the main harvesting season for a number of key staples got under way, while inflation of administered prices increase moderately as public transport fares were raised, specifically airfares and railway fares, in line with the abundance of public holidays.
    "Looking forward Bank Indonesia will continue to monitor inflation risks stemming from seasonal trends in the run up to the holy fasting month as well as other risks like potential pressures on administered prices and rising prices due to the forecasted El Nino even," BI said, adding it would bolster regional inflation control teams.
    Indonesia's trade balance remained in a deficit in April of US$ 1.96 billion while the financial account improved, BI said. Indonesia's current account deficit of $4.191 billion in the first quarter of this year was slightly down from $4.314 billion in the fourth quarter of last year.
    BI said the trade deficit was in line with seasonal trends due to the surge in demand in the run up to the holy fasting month of Ramadan and it expects a recovery of the global economy to help manufacturing exports while imports subside due to moderating domestic demand.
    Agus Martowardojo, BI governor, confirmed earlier this month that Indonesia's current account deficit would remain below 3 percent of Gross Domestic Product this year, down from a deficit of 3.3 percent in 2013.
    Foreign portfolio inflows amounted to $11.04 billion up to May, boosting foreign exchange reserves to $107.0 billion, up from $102.6 billion at the end of March.
    Indonesia's rupiah currency depreciated on average by 0.81 percent against the U.S. dollar during May to a 11.532 per dollar, with pressure on the exchange rate from stronger corporate demand from servicing external debt and dividend repatriation.
    "Moreover, investor behavior also influenced shifts in the exchange rate, with investors currently adopting a wait-and-see attitude until after the presidential election planned for July 2014," BI said.
    Earlier this week BI Senior Deputy Governor Mirza Adityaswara was quoted as saying that he was "comfortable" with an exchange rate between 11,300 to 11,800 to the dollar.
    Indonesia's economic growth continues to moderate, BI said, with household consumption slowing but still resilient. The non-construction investment turned a corner while exports eased due to the suspension of unrefined coal and mineral exports from the Minerba Act from January.
    "Nonetheless, exports from the manufacturing sector should continue to improve as the global economy recovers," BI said.
    Indonesia's Gross Domestic Product expanded by 0.95 percent in the first quarter of this year from the previous quarter for year-on-year growth of 5.21 percent, down form 5.72 percent.



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