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Business Desk

The Jakarta Post

Publication Date : 13-02-2013

Bank Indonesia (BI) on Tuesday kept its benchmark rate unchanged at the historic low of 5.75 per cent, on the back of optimism over manageable inflation and a more stable rupiah after the introduction of the new onshore quoting system.

The central bank has kept its benchmark at this level now for 12 months. The last cut in the rate, 25 basis points from 6 per cent, was in February of last year.

“The current policy rate is considered consistent with manageable inflation based on our target range of 4.5 plus minus one per cent in 2013 and 2014,” BI spokesperson Difi Johansyah said on Tuesday.

Monthly inflation picked up to 1.03 per cent in January, its highest level in four years, as bad weather and floods brought food shortages in many areas.

Higher-than-expected inflation in January was not problematic and inflation remained on target, BI Governor Darmin Nasution told reporters last week.

Inflationary pressure in January was a matter of cyclical shocks only and not a structural problem in the economy, he said, citing a low contribution from core inflation during the month (0.22 per cent).

Analysts fear that inflation may pick up in the coming months as the impact of gradual increases in electricity tariffs and the minimum-wage rise creep into the economy.

“Our baseline scenario assumes rate hikes later in the year, as growth remains on a solid trajectory and inflation is expected to heat up,” Fred Gibson, a Sidney-based associate economist with Moody’s Investors Service, wrote in a report distributed earlier this week.

BI reiterated that it would remain in the market to safeguard the rupiah. The new onshore quoting system for the rupiah will add liquidity to the foreign exchange (forex) market and support rupiah stability.

The central bank announced last week that it would allow local banks to set a time to quote rupiah spot rates against the dollar. The new quoting system could both promote a credible benchmark rate for the rupiah and guard the currency against speculation.

The introduction of BI’s new quoting system was a response to positivity in the local currency market, with the rupiah having risen for three consecutive days since the policy announcement, touching its strongest level in three months of 9,603 earlier this week.

The rupiah ended its three-day bull streak on Tuesday, falling 0.3 per cent to 9,644 in Jakarta, prices from local banks compiled by Bloomberg show.

On Tuesday BI also kept the deposit facility rate (Fasbi) unchanged at 4 per cent, 175 basis points below the BI rate, although economists believe that the central bank will raise its BI rate in the short-run to shore up the rupiah.

Citibank Indonesia economist Helmi Arman is forecasting a 25 basis point raise in Fasbi rate by the end of February as BI tries to counter future pressure on the rupiah stemming from Indonesia’s current account deficit.

“We have the view that any move on the Fasbi rate will likely be a reaction to pressure on the rupiah, which in turn is highly dependent on market sentiment,” he said on Tuesday.