12th December 2013
Indonesia’s central bank held its benchmark BI rate steady at 7.50 percent but will remain “watchful of the planned tapering policy by the Federal Reserve and will bolster the ongoing policy response.”
Bank Indonesia (BI), which has raised its rates five times this year by 175 basis points to curb inflation, also said its current stance was “consistent with ongoing efforts to bring inflation back towards the target corridor of 4.5+-1% in 2014 as well as to reduce the current account deficit to a more sustainable and sound level.”
The bank said there was evidence that Indonesia’s balance of payments would improve further in the final quarter due to a narrower current account deficit and inflows of capital that continue to offset this deficit. Foreign exchange reserves at the end of November were US$ 97.0 billion, steady from October.
In October Indonesia’s trade balance showed a surplus of US$42 million while the current account deficit narrowed slightly to $8.449 billion in the third quarter from the second quarter’s $9.954 billion.
The current account deficit is one of the main reasons that Indonesia has been vulnerable to capital outflows and downward pressure on its rupiah as global investors prepare for higher growth in advanced economies, including the United States.
“Looking forward, Bank Indonesia will continue to monitor a range of risks, including global economic uncertainty that could rapidly mushroom,” the bank said.
This year’s slowdown, which the BI said was “congruent” to its efforts to bring growth onto a more sustainable level, is expected be line with the bank’s forecast this year for growth of 5.5-5.9 percent.
For 2014 BI revised down its growth forecast to the lower end of its 5.8-6.2 percent range. In 2012 Indonesia’s economy expanded by 6.2 percent.
In the third quarter, Indonesia’s Gross Domestic Product grew by 2.96 percent from the second quarter for annual growth of 5.62 percent, down from 5.81 percent.
“Looking ahead, Bank Indonesia will continue to maintain rupiah exchange rate stability in line with its fundamentals, thereby supporting controlled economic consolidation,” the bank said.
The bank also said it had deepened rupiah and foreign exchange markets through “mini
Master Repo agreements between a number of banks and broadened the scope of medium and long-term hedging swaps between these banks and the central bank, another in a series of initiatives to bolster trading in rupiah markets.
Indonesia’s inflation rate stabilized at 8.37 percent in November from October’s 8.32 percent and BI projects 2013 inflation on average to remain below 8.5 percent – below the BI’s forecast from last month – and repeated that it expects this to drop to within the banks target corridor in 2014.
In 2012, Indonesia’s inflation rate was 4.3 percent but a scrapping of fuel subsidies and the fall in the rupiah has accelerated the rate.