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Indonesian central bank rules out monetary easing

Publication Date : 06-08-2014


Bank Indonesia Governor Agus Martowardojo ruled out Tuesday the possibility of loosening Indonesia's monetary policy in order to revive economic growth, which slumped to its lowest level in five years in the second quarter of this year.

Agus acknowledged that economic growth in the second quarter fell to the lower end of the central bank’s target range of 5.1 to 5.5 per cent. However, the slowdown is not seen as worrisome as policymakers are now targeting the economy to grow at a healthy and sustainable level to narrow the current-account deficit, which has been a major worry among investors, he added.

The Central Statistics Agency (BPS) reported on Tuesday that Indonesia posted a mere 5.12 per cent economic growth in the second quarter, a level unseen since 2009, when the country felt the pinch of the global financial crisis.

Meanwhile, central bank deputy governor Perry Warjiyo said the economic slowdown was still within the government’s projection. “The growth moderation is still in line with the need to stabilise our economy, especially the need to manage the current-account deficit and inflation,” he said.

Last year, the central bank hiked its benchmark rate by a cumulative 175 basis points to 7.5 per cent to put the brakes on overly rapid economic growth, which was seen as posing a risk of overheating the heating.

Asked whether the bank’s monetary tightening had been excessive and could kill economic growth, Perry responded: “We don’t think so.”

Indonesia’s robust economic expansion, with growth peaking at 6.5 per cent in 2010, was mostly fueled by imports, consequently prompting a widening in the current-account deficit that spooked investors.

The current-account deficit hit an historic high of US$10 billion in the second quarter last year, with policymakers responding to the issue by performing various fiscal and monetary tightening moves to narrow the deficit and steer the economy to a more sustainable pace of expansion.

Finance Minister Chatib Basri predicted on Tuesday that economic growth, although slowing to 5.1 perc ent in the second quarter, would rebound to at least 5.4 per cent in the third and fourth quarters, supported by stronger government spending and exports.

Meanwhile, Coordinating Economic Minister Chairul Tanjung said the economic growth slump was in line with the slowdown in the global economy. The economic slowdown experienced by major trading partners, particularly China, has caused a decline in Indonesia’s exports, one of the important contributors to the country’s gross domestic product (GDP) growth.

BPS data showed that in the second quarter, government spending and exports weighed down economic growth as they contracted by minus 0.7 per cent and minus 1 per cent year-on-year, respectively.

Domestic demand and investment — the two major growth drivers that jointly account for 87 per cent of Indonesia’s GDP — still expanded robustly as they surged 5.6 per cent and 4.5 per cent year-on-year, respectively.

“In light of the ongoing pressures on the budget and current-account deficit, this [economic] deceleration is good news,” said Lim Su Sian, an Asean economist with HSBC Bank.

She warned, however, that it was too early to throw caution to the wind, especially as consumption was “still above trend” and other indicators pointed to robust domestic activity.

Bank Danamon economist Dian Ayu Yustina noted that chances of the central bank easing its monetary policy in the short term were unlikely because of daunting economic challenges next year due to the prospect of a fuel price hike, combined with the upward trajectory of interest rates that could trigger capital outflows.

“It would need more than just monetary policy — interest rate hikes — to address the external imbalances,” Dian wrote in a note distributed to clients on Tuesday. “Structural policies must come forth to address the infrastructure problems, productivity and support the manufacturing sector to reduce reliance on commodity exports.”


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