In­done­sia keeps in­ter­est rate at record low, risk­ing cred­i­bil­ity

The Pak Banker - - Company& -

JAKARTA: Bank In­done­sia kept its bench­mark in­ter­est rate at a record low, putting its in­fla­tion-fight­ing cred­i­bil­ity at risk as it judges the econ­omy can cope with ac­cel­er­at­ing price gains, Bloomberg re­ported .

The cen­tral bank main­tained its ref­er­ence rate at 6.5 per­cent for a 16th meet­ing, it said in Jakarta to­day. All 20 econ­o­mists sur­veyed by Bloomberg News had ex­pected the de­ci­sion. The mea­sure is at the low­est level since its in­tro­duc­tion in July 2005.

"Bank In­done­sia is risk­ing be­ing be­hind the curve," said Vishnu Varathan, an econ­o­mist at Cap­i­tal Eco­nom­ics in Singapore. "In­fla­tion is pick­ing up faster than an­tic­i­pated. Mon­e­tary pol­icy acts with a lag and Bank In­done­sia wouldn't want in­fla­tion ex­pec­ta­tions to be­come unan­chored."

In­done­sia has avoided rais­ing in­ter­est rates this year even as a re­gional re­bound prompted moves by China, In­dia, Malaysia, South Korea, Thai­land and Tai­wan, whose bench­marks are lower. The cen­tral bank, which has or­dered len­ders to set aside larger re­serves to rein in liq­uid­ity with­out hurt­ing eco­nomic ex­pan­sion, said to­day it may reg­u­late ru­piah bank ac­counts held by non-res­i­dents to mit­i­gate the im­pact of cap­i­tal in­flows.

"Ques­tions will per­sist as to how much longer the rate would stay at 6.5 per­cent if in­fla­tion were to con­tinue inch­ing higher," Gundy Cahyadi, an econ­o­mist at Oversea-Chi­nese Bank­ing Corp. in Singapore, said be­fore the de­ci­sion. "This may trig­ger some cred­i­bil­ity is­sues even­tu­ally." In­done­sia's con­sumer prices rose 6.33 per­cent last month from a year ear­lier, the Cen­tral Bureau of Statis­tics said Dec. 1, ex­ceed­ing all es­ti­mates in a Bloomberg News sur­vey of 20 econ­o­mists. The gain com­pared with a 5.67 per­cent in­crease in Oc­to­ber.

Thai­land has boosted bor­row­ing costs three times this year, most re­cently this week, match­ing the num­ber of moves by Bank Ne­gara Malaysia. Singapore's cen­tral bank, which uses the ex­change rate to man­age in­fla­tion, has tight­ened its mon­e­tary stance twice this year, revalu­ing its cur­rency in April and say­ing it would al­low faster cur­rency gains.

China, which raised rates in Oc­to­ber, will shift to a "pru­dent" mon­e­tary pol­icy next year from a rel­a­tively loose stance, Xin­hua News Agency re­ported to­day, cit­ing a work meet­ing of Po­lit­i­cal Bureau of the Com­mu­nist Party of China Cen­tral Com­mit­tee.

Bank In­done­sia has de­layed a rate in­crease that could at­tract more funds at a time when emerg­ing mar­kets are lur­ing in­vestors away from de­vel­oped economies. The Jakarta Com­pos­ite In­dex has gained 46 per­cent this year, boost­ing stocks of com­pa­nies in­clud­ing lender PT Bank Cen­tral Asia and noodle­maker PT Ind­o­food Suk­ses Mak­mur. The ru­piah has risen more than 4 per­cent against the dol­lar.

Bank In­done­sia may reg­u­late so-called vostro ac­counts, or ru­piah cur­rent ac­counts held by non-res­i­dents in do­mes­tic banks, the cen­tral bank said in a state­ment to­day. "By us­ing the vostro ac­counts, there is an im­plicit ac­knowl­edge­ment that they need to hike rates to tackle in­fla­tion with­out get­ting dis­tracted by other is­sues, which must be han­dled by other pol­icy tools," Varathan said.

The bench­mark in­ter­est rate is "con­sis­tent" with the cen­tral bank's in­fla­tion tar­get, Bank In­done­sia said. The pace of price in­creases may ex­ceed 6 per­cent "slightly" by the end of the year, it said. -PB News

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