Bank Indonesia Will Likely Maintain Rate With Inflation Held in Check

Dion Bisara & Muhamad Al Azhari

The central bank, Bank Indonesia, will likely hold its policy rate as the economic outlook remains bright, dismissing concerns of a pickup in inflation, analysts say.

“Bank Indonesia meets on Thursday and we expect rates to remain unchanged at 5.75 percent,” said Prakriti Sofat, economist at Barclays Capital in Singapore, in a note to clients on Monday.

The central bank has kept its key rate in the last five months after cutting it by 25 basis points in February to maintain growth momentum at home and defend the country’s economy from the effects of a slowdown in Europe and the United States.

Bank Indonesia said in its July 12 statement that economic turbulence in Europe and weakening exports have put pressure on the rupiah. July’s pause was also aimed to support the currency, it said. The rupiah has lost 4.5 percent against the dollar this year.

Prakriti said further monetary easing “would weigh on the rupiah,” given relatively strong economic expansion in the second quarter and already accelerating inflation. She said inflation could reach the top end of Bank Indonesia’s forecast of 3 percent to 5 percent. Inflation accelerated in July at a 4.56 percent year-on-year rate, from June’s 4.53 percent.

The economy expanded 6.4 percent year-on-year in the second quarter, on the back of strong household spending and a pickup in investment. That was faster than the 6.3 percent growth for the first quarter.

Helmi Arman, an economist at Citibank Indonesia, and Anton Gunawan, the chief economist at Bank Danamon, also say the central bank is likely to hold its key rate at 5.75 percent.

Bank Indonesia will likely focus on guarding the rupiah, while being cautious on its statement about Indonesia’s “external trade balance,” which has been weakening due to slower demand from the world, said Helmi, who doesn’t rule out a 50 basis point increase in 2013.

Anton says inflation is likely to remain contained, despite the weak rupiah, and that is one of the reasons that Bank Indonesia is likely to maintain monetary policy. “We have not seen any significant imported inflation pass through.”

Imported inflation occurs when prices are rising due to goods, such as electronics and automotive parts, purchased from abroad.