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Indonesia holds interest rate as external pressures ease

Publication Date : 09-11-2012

 

Indonesia has kept its benchmark interest rate at 5.75 per cent for the ninth consecutive month on better economic fundamentals.

Bank Indonesia, the central bank, said that there was no urgent need to change the benchmark rate, given the nation's improving trade balance, current account deficit and low inflation rate.

"The benchmark interest rate is still consistent with inflation trends that are still in line with the 2012 and 2013 target, which stands at 4.5 per cent, with a deviation of 1 per cent at the most," Bank Indonesia strategic planning and public relations department head Dody Budi Waluyo said yesterday.

"Pressures from external imbalances have also begun to ease, with a decrease in the current account deficit, and the performance in the balance of payments, which has finally recorded a surplus," Waluyo said in the statement.

The nation's trade surplus was US$553 million in September, up from $233 million in August, while its current account deficit reached $5.3 billion, or 2.4 per cent of the gross domestic product (GDP), down from 3.5 per cent in the previous month, according to Bank Indonesia.

The central bank previously estimated the nation's current account deficit in the third quarter would be slightly higher, at 2.6 per cent of the GDP.

Waluyo said that the improvement in the current account deficit was triggered by a more favourable trade balance and increasing foreign direct investment.

"Imports steeply decreased, particularly on consumer goods, while non-oil-and-gas export commodities, such as crude palm oil have started to grow," Waluyo said.

Realised investment in Indonesia topped $8.52 billion in the third quarter, up 25 per cent from a year earlier, according to the Investment Coordinating Board.

Waluyo added that Bank Indonesia is predicting that the nation's economy will grow more in the fourth quarter, after missing its third quarter growth target of 6.3 per cent.

Separately, Bank Mandiri economist Leo Putera Rinaldy predicted that Bank Indonesia's benchmark interest rate will remain unchanged until the end of this year.

"We believe that Bank Indonesia has determined that adjusting the rate, whether upward or downward, will not positively affect the current economy," Rinaldy told The Jakarta Post on the telephone.

"Bank Indonesia will have a hard time increasing its rate, because the impact of the global crisis has become more evident in the third quarter, during which the economy has had the tendency to slow down," Rinaldy said.

"On the other hand, the central bank also cannot decrease its rate, because doing this will only put more pressure on the rupiah."

The rupiah has weakened by 0.36 per cent to 9,605 rupiah per US dollar in October on a month-to-month basis, according to Bank Indonesia.

Although the central bank might not reduce its interest rate to maintain the rupiah's fundamental value, Rinaldy said that Bank Indonesia might also give a bit more tolerance for the weakening currency to support exports.

 

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