Indonesia's central bank raised its benchmark BI rate by 25 basis points to 7.75 percent to ensure that an expected uptick in inflation from the government's 30 percent hike in fuel prices is temporary and that inflation quickly returns to the bank's 2015 target range of 4.0 percent, plus/minus one percentage point.
Following an extraordinary meeting the day after Indonesian President Joko Widodo announced the sharp reduction in government fuel price subsidies, Bank Indonesia (BI) welcomed the move, saying it would reduce oil imports and thus the current account deficit, while social assistance to the poor will help offset the potential decline in purchasing power and the allocation of funds to infrastructure and productive capacity will ensure sustainable economic growth.
While the central bank raised the benchmark BI rate 25 basis points in the first rate hike since November 2013, it also widened its interest rate corridor by raising the lending facility rate by 50 points to 8.0 percent and maintaining the deposit rate at 5.75 percent to manage liquidity and support a deepening of financial markets.
BI, which also raised rates last year in response to a reduction in government fuel subsidies, confirmed its forecast from its regular board meeting last week that economic growth should be in the range of 5.4-5.8 percent next year, adding that it would be higher in the medium-long term.
Enacting an election promise, President Widodo said late yesterday that he would raise the price of subsidized gasoline to 8,500 rupiah a liter from 6,500 and diesel would be raised to 7,500 from 5,500.decision. The move has spurred speculation that his new government may completely scrap the decades old system of fuel subsidies, with has accounted for more than 10 percent of spending.
Indonesia's current account deficit has been fueled by a large deficit in oil and gas trade. The current account deficit has left it vulnerable to foreign investors and last year capital started to flow out of the country, putting pressure on its currency, following news that the U.S. Federal Reserve was considering tapering its asset purchases.
But a total rate hike of 175 basis points by the BI in 2013 help curb inflationary pressures after headline inflation jumped to 8.61 percent in July from 5.9 percent the previous month. Inflation then remained above 8 percent before slowly easing to a low of 3.99 percent in August this year.
Last month Indonesia's headline inflation rose to 4.83 percent and last week the BI said it expected inflation to continue to trend downwards and meet its 2014 target of 4.5 percent, plus/minus one percentage point.
In today's statement, the BI implied that it did not expect inflation to meet its target this yea
Indonesia's current account deficit narrowed to US$ 6.836 billion in the third quarter from $8.689 billion in the second quarter, mainly due to a significant surplus in non-oil and gas balance and positive manufacturing exports and recommenced exports of unrefined mineral exports
Bank Indonesia issued the following statement: