April 8, 2014 / 8:01 AM / in 4 years

UPDATE 2-Indonesia c.bank keeps rates on hold as inflation eases

* Policy rate on hold at 7.50 pct for 5th straight meeting

* FASBI and lending rate also unchanged

* BI sees Q1 GDP growth at 5.77 pct y/y

By Adriana Nina Kusuma and Rieka Rahadiana

JAKARTA, April 8 (Reuters) - Bank Indonesia kept its benchmark reference rate steady for a fifth straight month, saying the current level was consistent with efforts to meet its inflation target this year.

The policy stance will also help lower the country’s large current-account deficit, which unnerved investors last year when it climbed to record highs and sparked a sell-off in the rupiah.

Southeast Asia’s largest economy appears to have turned a corner with its trade balance reverting to surplus in February and inflation easing.

With confidence returning to the rupiah, Bank Indonesia has held rates steady this year while other major emerging economies were forced to raise them to fend off outflows.

“Provided inflation falls back as expected and there is no renewed pressure on the rupiah, the next move in rates is likely to be downwards, but probably not before the end of the year,” said Krystal Tan, Asia economist at Capital Economics.

All 15 analysts in a Reuters poll had expected the policy rate to be kept on hold as pressures had eased on both the current-account deficit and the rupiah. The Indonesian currency has rebounded, up 7.7 percent so far this year to become Asia’s best performing currency after being its worst last year.

The central bank also held the deposit facility rate (FASBI) and lending facility rate at 5.75 percent and 7.50 percent, respectively.

Singapore-based economist at OCBC, Wellian Wiranto, said the central bank may face pressure to cut rates on some views easing inflation should be followed with loose monetary policy.

“Loosening the belt to allow more gorging may seem immediately gratifying but is hardly helpful to the economy’s long-term health,” Wiranto said.

Bank Indonesia said the economy in the first quarter would grow 5.77 percent, a shade faster than the fourth quarter, bolstered by the global recovery.

The central bank last month trimmed its growth forecast to 5.5-5.9 percent this year from 5.8-6.2 percent, despite an increase in spending for legislative and presidential elections.

Indonesia has reaped from a recovery in commodity prices, mainly coal and crude palm oil, which helped turn its trade balance in February to a surplus of $790 million from a $450 million deficit the previous month.


The central bank has repeatedly expressed concern over core inflation, an indicator of the longer-term trend in consumer prices, and reiterated it would keep a close eye on prices.

“Going forward, BI will remain vigilant on some risks ... such as the adjustment in administered prices and the potential of rising food prices due to the dry season in some regions, including the possibility of El Nino,” said central bank spokesman Tirta Segara.

The central bank aims for a range of 3.5 to 5.5 percent for inflation in 2014, far lower than the 8.38 percent rate of last year, but remains watchful of factors that may push prices up.

Indonesia’s consumer price index nearly breached 10 percent in mid-2013 after fuel price increases in late June.

A Bank Indonesia survey on Friday showed that consumers were more optimistic about the economy in the next six months but remain concerned over the political and economic outlook after presidential elections in July. The survey also found that consumers see the possibility of further rises in fuel prices and electricity tariffs this year.

The government plans to propose revising the budget in May, after a new parliament is formed, with possible cuts to allocation for fuel subsidies that may force the central bank to raise its policy rate to mitigate inflation from rising prices.

Bank Indonesia has estimated that the current-account deficit will fall under 3 percent of gross domestic product this year, compared with 3.3 percent in 2013.

The widest measure of the flow of goods, services and money in and out of the country hit a record of 4.4 percent in the second quarter of last year. (Additional reporting by Nilufar Rizki and Cheon Jong Woo in SINGAPORE; Editing by Jacqueline Wong)

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