Bank Indonesia may raise deposit facility rate: Deputy chief
Bank Indonesia may gradually raise the rate it pays lenders on overnight deposits while keeping the benchmark unchanged, Deputy Governor Hartadi Sarwono said, signaling the need to boost short-term borrowing costs as the rupiah declines.
“There’s a possibility that the Fasbi rate will be gradually increased,” Sarwono said in an interview at the central bank in Jakarta, referring to the deposit facility rate. “There’s no pressure to change” the main reference rate in the next three to six months, because it is still “consistent” with the inflation target, he said.
Indonesia has kept its benchmark interest rate unchanged at a record-low 5.75 percent for nine meetings, refraining from joining neighbors from Thailand to the Philippines in extending monetary easing as growth exceeding 6 percent reduces the need for stimulus. At the same time, rising imports have spurred a current-account deficit and weakened the rupiah, prompting the central bank to intervene to limit exchange-rate fluctuations. The central bank needs to look more closely at the Fasbi rate because exporters may not want to sell their dollars to finance their domestic business when they can borrow cheaply on the rupiah market, Sarwono said. His biggest concern is the day- to-day volatility of the currency that may hurt investor confidence, rather than growth or inflation, he said. The rupiah fell 0.2 percent to 9,635 per dollar as of 1:48 p.m. in Jakarta, prices from local banks compiled by media.
“We don’t have to overreact in our policy implementation but managing day-today liquidity is important,” Sarwono said. “We don’t want to choke economic activity because this is only a short-term problem, not a medium- and longer-term problem.” Bank Indonesia raised the deposit facility rate in August to 4 percent from 3.75 percent, even as it has left the key reference rate unchanged since a cut in February.
The Fasbi rate is “in many ways more important” than the reference rate because it represents the floor for interbank borrowing costs, Jens Lauschke and Eugene Leow, analysts at DBS Group Holdings Ltd. in Singapore, said in an August report. Lenders have no incentive to loan to other banks at levels below what they can earn at Bank Indonesia, so Fasbi rate changes can have “significant impact” on interbank rates and the rest of the yield curve, they said. Economists from Bank of America Corp. and HSBC Holdings Plc are among those predicting the central bank will raise the deposit facility rate by 75 basis points in coming months. The rate will reach 4.75 percent by the middle of 2013, Chua Hak Bin, an economist at Bank of America, said in a Nov. 8 report.
“Given the ongoing looseness of monetary settings and the robustness of domestic indicators, we think the central bank still needs to work at keeping domestic demand - and hence import pressures - contained,” Lim Su Sian, an economist at HSBC, who sees scope for three 25 basis-point increases in the Fasbi rate, said in a Nov. 8 research note. Indonesia’s currency has fallen about 6 percent against the dollar this year, the biggest decline among the 11 most-traded Asian currencies tracked by Bloomberg.
The currency probably won’t weaken further and will start appreciating as the current-account shortfall narrows and the capital-account surplus improves, Sarwono said. The decline this year was because of the current-account deficit and the central bank didn’t try to prevent the drop, he said.
“We don’t use a depreciation policy to support exports so we just let the fundamentals of the economy dictate the movement of the exchange rate,” he said. The current exchange rate of about 9,600 rupiah a dollar is “still consistent with the fundamentals and it will move back to an appreciation trend” when uncertainty over the global economy abates, he said.