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Indonesia keeps rate at record low to boost exports

Publication Date : 12-10-2012

 

The Bank Indonesia (BI) has kept its benchmark interest rate at a record low of 5.75 per cent for the past eight months to support economic growth amid the slow pace of recovery in the world economy.

BI Governor Darmin Nasution said in Jakarta yesterday that the low interest rate was still needed to help local companies cope with the decline in exports.

“The likely recovery in our exports is still overshadowed by the uncertainty in the global economy,” he told reporters in a press briefing to announce the interest rate. Darmin said that BI would determine its future policies based on the development of the global economic recovery.

Indonesia recorded only US$14.12 billion in exports in August, down 12 per cent from the previous month, according to the Central Statistics Agency (BPS).

The country, however, still managed to record a $250 million trade surplus during the month, as the decline in exports was offset by a sharper slump in imports.

“The trade surplus is still volatile, we’ve seen how our exports were lower than our initial expectations,” BI deputy governor Halim Alamsyah explained.

By keeping its benchmark rate at 5.75 per cent, BI seemed to brush off suggestions voiced by Fitch Ratings, which last week released a report calling on the central bank to implement “tighter policy settings” to avert economic overheating stemming from the country’s increasing macroeconomic imbalances.

Darmin justified his decision to maintain a loose monetary stance by arguing that currently there was less inflationary pressure in Indonesia, where monthly inflation in August touched 0.01 per cent, its lowest level in five years.

Global inflation is also “moderate” because of the downward trend in commodity prices, he added.

“Such a situation has pushed authorities in countries around the world to also apply loose monetary policies,” the central bank governor said.

BI has been joined by its central bank counterparts across the world, which have maintained a loose monetary stance by slashing rates or keeping them at record lows as protective measures against the global downturn.

“Practically, BI is one step ahead of its counterparts. Last year, when other central banks were yet to act, BI had already cut its benchmark rate in anticipation of the global slowdown, which turned out to be the right [decision],” Standard Chartered economist Eric Sugandi said.

Eric predicted that the central bank would maintain its benchmark rate at 5.75 per cent at least until the first half of 2013 to safeguard the rupiah, which he argued was already hovering at its optimum level at the moment.

The rupiah rallied 0.6 per cent to 9,583 to the dollar on Wednesday after the announcement of the BI decision, according to prices from local banks compiled by Bloomberg. The currency touched 9,657 earlier, its lowest level in three years.

Darmin said that the rupiah saw “less intense depreciation pressure” in September as foreign investors flocked to Indonesia to tap into the country’s strong domestic demand.

A more stable rupiah has led to an increase in the central bank’s foreign exchange reserves, which rose to $110.17 billion at the end of September, higher than the $108.9 billion it recorded a month earlier.

 

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