Bank Indonesia holds key rate at 7.5%

Bank Indonesia has lost about US$7.5 billion of its foreign exchange reserves from February to last month, partly to defend the rupiah.
Bank Indonesia has lost about US$7.5 billion of its foreign exchange reserves from February to last month, partly to defend the rupiah.PHOTO: REUTERS

JAKARTA • Indonesia's central bank kept its key reference rate on hold yesterday as it resisted loosening policy to bolster an economy growing at its weakest pace since the global financial crisis.

Bank Indonesia (BI) said interest rates were in line with its inflation targets for this year and next. The country is wrestling with weak exports and consumption, but a frail rupiah and rising inflation has limited BI's options to cut rates to spur growth, which in the first quarter was at its weakest since 2009.

As widely expected, it kept the benchmark interest rate at 7.5 per cent, unchanged for a fifth meeting in a row. Mr Gareth Leather, Asia economist with London-based Capital Economics, said: "The main constraint on policy loosening at the moment is high inflation... We think the central bank will wait until later in the year, when inflation is set to drop sharply as the impact of last year's fuel subsidy falls out of the annual comparison, before it cuts rates."

Annual headline inflation last month picked up to to 7.26 per cent from 7.15 per cent, the highest this year, but BI said yesterday it was still confident inflation would cool to its target range of between 3 per cent and 5 per cent this year.

BI last cut the benchmark rate by 25 basis points in February, unwinding a surprise rate hike it made in November last year. Yesterday, it also held its overnight deposit and lending facility rates at 5.5 per cent and 8 per cent. Its decision comes two weeks ahead of second-quarter economic growth figures. It said it supported the government's effort to accelerate infrastructure spending. The realisation of these projects will push up growth starting in the third quarter, but growth in April-June is expected to remain "limited".

Sluggish growth could prompt a rate cut later in the year. "The earliest chance of a rate cut will be towards the end of the year - on two big conditions of an orderly Fed exit and also lower domestic inflation," OCBC Bank's economist Wellian Wiranto said.

While the rupiah's relative weakness remains a constraint for future rate cuts, DBS economist Gundy Cahyadi feels BI may continue to prop up the fragile rupiah.

The rupiah has been broadly stable since last month, trading around 13,300 per dollar. It barely moved after the rate announcement.

A version of this article appeared in the print edition of The Straits Times on July 15, 2015, with the headline 'Bank Indonesia holds key rate at 7.5%'. Print Edition | Subscribe