Indonesia holds key interest rate at 7.5%

JAKARTA, Indonesia – Indonesia’s central bank held its key interest rate steady for the second consecutive month on Tuesday, April 14, seeking to balance concerns over a weakening currency and slowing growth.

Bank Indonesia’s board of governors kept the rate at 7.50%, as expected.

The bank cut the rate by 25 basis points in February in a bid to boost growth, which slipped to a 5-year low in 2014, and after inflation slowed on the back of falling fuel prices.

However, the cut led to steep falls in the rupiah against the dollar, prompting the bank to pause.

The central bank said Tuesday that the currency had lost more than 2% of its value in March from a month earlier, and pledged to maintain the rupiah’s stability.

Tighter monetary policy tends to boost the value of a country’s currency, but analysts do not expect Indonesian policymakers to raise rates soon with growth sagging.

The bank highlighted its dilemma on Tuesday, cautioning that growth is likely to come in this year at the lower end of its 5.4 to 5.8% target range.

In a statement, Bank Indonesia, which is independent of the government, suggested it was down to the authorities to boost growth, saying that “the achievement of the growth rate will be affected by how big and fast the realization of government infrastructure projects will be”.

The new government of President Joko Widodo has made boosting the country’s creaking infrastructure – long a complaint of investors – a key plank of its plan to revive the economy.

Gareth Leather, Asia economist from London-based Capital Economics, said that he expected more rate cuts this year.

“With low commodity prices set to act as a drag on the economy this year, further easing will be needed if growth is to get anywhere near the central bank’s forecast,” he said. – Rappler.com