Tuesday, October 8, 2013

Indonesia holds rates, sees inflation returning to target

    Indonesia's central bank held its policy rates steady, saying it expects past rate increases and macroprudential measures to help bring down the current account deficit "to a more healthy level" while inflation is expected to return to the target.
    Bank Indonesia (BI), which has raised its benchmark BI rate four times this year by a total of 150 basis points to limit inflation and the fall in the rupiah currency, held the BI rate steady at 7.25 percent, the lending rate at 7.25 percent and the deposit rate at 5.50 percent. All three rates were raised by 25 basis points in September.
    The central bank expects the global economy to continue to slow and is characterized by a high degree of uncertainty, putting pressure on the country's exports. In the third quarter, Indonesia's economy is expected to expand by 5.6 percent, down from 5.8 percent in the second and 6.03 percent in the first quarter.
   For the full year, Indonesia's Gross Domestic Product is still forecast to expand by 5.5-5.9 percent.
    Next year, the economy is expected to improve, growing between 5.8 and 6.2 percent. Last month Bank Indonesia cut its growth forecasts for this year and next.

    Indonesia's inflation rate picked up sharply in recent months following the government's increase of subsidized fuel prices by an average of 33 percent in June and the central bank said it still expects average inflation this year to hit 9.0-9.8 percent before easing toward the bank's range of 4.5 percent, plus/minus one percentage point in 2014.
    In September Indonesia's headline inflation rate eased to 8.4 percent from 8.79 percent in August, in line with the central bank's expectation that inflation will slowly return to normal from September.
    The depreciation of Indonesia's rupiah has also increased inflationary pressures but the currency has recently started to stabilize after slowly falling in mid-May with the fall accelerating from mid-July.
    The central bank said the depreciation was mainly due to sentiment surrounding the expected tapering of asset purchases by the U.S. Federal Reserve against the background of a relatively high current account deficit.
   In the third quarter the rupiah weakened by an average of 8.18 percent to the U.S. dollar from the second quarter. The rupiah was quoted at 11.163 to the dollar today, up from 11,580 at the end of September but down 16 percent from the start of the year.
    "Bank Indonesia views the exchange rate at the moment as describing the condition of Indonesia's economic fundamentals," the central bank said.
    Indonesia's current account, which grew to $9.850 billion in the second quarter from $5.270 billion in the first quarter, is expected to narrow in the third quarter due to lower imports from weaker domestic demand and the impact of the weaker rupiah, the central bank said.
    The Federal Reserve's delayed tapering of asset purchases last month, a greater surplus in the capital account, a re-entry of foreign investors and reduced selling of domestic stocks helped boost foreign reserves to $95.7 billion at the end of September from $93.0 billion end-August, the equivalent of 5.2 months of imports.


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