Thursday, September 8, 2011

Indonesia central bank holds rate, lowers interbank band

JAKARTA: Indonesia's central bank left its main policy rate unchanged on Thursday for a seventh straight month, choosing to ignore a temporary upward blip in inflation in favour of caution as the global economic outlook deteriorates.

At the same time, Bank Indonesia lowered the floor of the trading band for interbank overnight rates by half a percentage point to give its banking system the flexibility to deal with fickle cash conditions and fluctuating money market rates.

Core inflation in August rose above the 5 percent mark that one central bank official suggested is the threshold for a policy shift.

Yet Thursday's decision to hold the policy rate at 6.75 percent confirmed that the central bank views the upward blip in food, clothing and gold prices during the Ramadan festivities as temporary.

It also put Indonesia in the growing camp of central banks shifting focus away from inflation to growth as they brace for a protracted period of weak global demand.

South Korea left rates on hold for a third month at a review on Thursday, Australia's did the same earlier this week.

Inflationary pressures in Southeast Asia's largest economy are subdued and growth is robust in the largely domestic-driven economy. Analysts therefore suspect the fear of financial contagion and market volatility is behind Bank Indonesia's decision to err on the side of caution.

That seemed to be the reason Bank Indonesia widened the floor of its interbank overnight rate to 150 basis points below the policy rate, from 100 basis points below previously.

"This decision is taken by considering the need to guard economic stability amid rising uncertainties in the global financial system triggered by the U.S. and Europe debt problems," Bank Indonesia said in a statement.

Indonesia's stock market, Asia's best performing this year, has been spared a lot of the volatility spawned by Europe's debt crisis and faltering global growth.

But, having used a rising rupiah to keep price pressures in check, the central bank is worried about market turbulence and potential capital outflows from Southeast Asia's largest economy.




All 12 analysts polled by Reuters had forecast a rate hold. BI made a surprise move to raise the policy rate by 25 basis points in February to address inflation worries.

Core inflation in August accelerated to 5.15 percent, though broader inflation remained manageable at 4.79 percent as Muslims spent more on foods, clothes and transport to celebrate Eid.

Analysts also expect Bank Indonesia to leave the rate unchanged for the rest of 2011 as part of efforts to maintain solid growth at a time of increasing worry about the global economy, given woes in Europe and the United States.

"The focus has switched back to growth instead of inflation," said Eugene Leow, an economist with DBS in Singapore.

"With the external economy more uncertain, the central bank has to be seen to help to boost the economy and is likely to keep rates low. It looks unlikely that they will be willing to hike rates this year.

"Inflation has been surprisingly tame so looks like this sweet spot will continue for a while more," Leow said.

BI Governor Darmin Nasution told Reuters in an Aug. 25 interview that the bank would prefer to continue using monetary policy tools rather than rate rises to counter increasing prices or to slow loan growth.

The central bank has allowed the rupiah rise to a seven-year high and used other macroprudential measures to tame inflation after the surprise 25 basis point rate increase in February aimed at calming the market.

The rupiah has risen 5 percent against the U.S. dollar so far this year, one among the top gainers in Asia along with the Korean won and Singapore dollar.

Indonesia's benchmark stocks index is up 13.7 percent so far this year on a dollar basis, while the MSCI Asia Pacific ex-Japan index is down 10.5 percent.

BI has tried to keep the policy rate low to help spur bank lending, which grew by 24 percent in August from a year ago, and economic expansion seen at 6.6 percent this year. ' Reuters



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