Indonesia holds key interest rate at 7.50%

JAKARTA, Indonesia – Indonesia’s central bank held the benchmark interest rate at 7.50% on Thursday, September 11, despite sluggish growth, in a bid to take pressure off its current account.

Southeast Asia’s top economy in the second quarter posted its slowest growth rate in 5 years with inflation easing to 3.99% in August, well within the bank’s target range. Prices had spiked on fuel-price hikes last year.

But Bank Indonesia has resisted slashing rates to boost growth to prioritise its current account, which hit a near-record deficit of $9.1 billion, or 4.27% of GDP, in the second quarter of this year.

The bank hiked the rate to 7.50% in November last year to rein in its widening deficit and has held pat ever since.

Gareth Leather, an economist with Capital Economics, said that the decision to keep the rate steady was widely expected.

Demand for Indonesian commodities has weakened in the past year but is starting to show signs of recovery as growth in major economies picks up.

The country has also struggled to keep imports proportionally lower in the past year.

But Leather was optimistic the deficit would fall back over the next year.

“Stronger global demand, which should boost manufacturing exports, will help to compensate for weaker commodity prices,” he said in a note.

Lower domestic demand for imports should also help relieve the current account, he said.

Bank Indonesia spokesman Tirta Segara said that Indonesia must be cautious as it was vulnerable to the US Federal Reserve’s normalization policies.

“Going forward, there are still several external and internal risks to economic stability,” he said, adding that the Fed could begin hiking interest rates in the first half of 2015.

Such hikes will likely lead to sell-offs of emerging-market currencies.

Indonesia’s economy grew by 5.12% in the second quarter, the slowest pace since the third quarter of 2009, battered by a mineral ore export ban.

Boosting growth and keeping the current account in check will be major challenges for President-elect Joko Widodo, who will be inaugurated next month.

Bank Indonesia forecasts annual growth of 5.1% to 5.5% this year. – Rappler.com