Indonesia Central Bank to Keep Rates on Hold to Support Econ

Bareksa.com -  Indonesia's central bank is expected to keep interest rates unchanged at its meeting on Thursday to support the economy as exports weaken and add pressure on the current account.

Analysts said that while a tighter stance may be needed to rein in the current account deficit in Southeast Asia's largest economy due to buoyant consumption, further tightening may put too much pressure on growth.

All eleven analysts surveyed in a Reuters poll expect Bank Indonesia to keep its key interest rate at 7.50 percent for the seventh consecutive month at is policy meeting on Thursday.

Indonesia's GDP expanded at its slowest pace in more than four years in the first quarter at 5.21 percent from a year earlier, hit by the impact of a mineral export ban imposed in January and slowing investment.

The central statistic agency reported an unexpectedly large trade deficit of nearly $2 billion in April, as weaker commodity prices also dragged on exports and renewed pressure on the current account.

The country's current account deficit unnerved investors last year when it climbed to record highs and sparked a sell-off in the rupiah. But with inflation moderating, the central bank can now begin to focus on keeping the growth rate from slowing further and getting its trade balance back to surplus.

"A stable BI rate at 7.50 percent may be here for a lot longer than many think," said Gundy Cahyadi, an economist with DBS Bank.

"Risks for a rate hike are higher compared to a cut, but we think BI may continue to hold its policy rate constant for now."

Strong domestic consumption, buoyed in part by presidential election spending, are fuelling imports and weighing on the trade balance. Keeping policy tight should help temper demand.

"Given Indonesia's exports are less geared to the anticipated pick-up in demand from the developed western economies than other Asia economies, the narrowing of its current account deficit should come from import compression," Credit Suisse said in a research report.

The central bank has indicated that it will continue to maintain tight policy to bring the current account deficit below 3 percent this year from 3.3 percent last year.

Between June to November last year, the central bank increased key interest rates by 175 basis point to lower the current account deficit and support the rupiah, Asia's worst performing currency.

The rupiah has regained its footing but remains fragile. It lost about 0.7 percent against the dollar in May.

Cahyadi of DBS Bank said the current account deficit was likely to be around 2.7 percent of GDP this year, which he added was "decent enough" even though it was still over the more sustainable 2-percent mark.

Bank Indonesia has expressed concerns about inflationary pressures, an indicator of the longer-term trend in consumer prices, and has repeatedly said it will keep a close watch on prices, including the possibility of El Nino.

Annual inflation picked up in May to 7.32 percent from 7.25 percent in April due to higher food costs (Source : Reuters)