Indonesia's C.Bank Holds Rates Despite Inflation Spike

Bareksa.com - Indonesia's central bank kept policy rates on hold at its last policy meeting of the year on Thursday, as expected, saying levels were consistent with efforts to contain inflation after a fuel price hike.

Bank Indonesia (BI) held its benchmark rate steady at 7.75 percent, a negative real interest rate when compared to the annual inflation estimate for December of around 7.7-8.1 percent.

The central bank quickly raised its key rate by 25 basis points on Nov. 19 to contain inflation expectations after the government announced a more than 30 percent hike in fuel prices the day before. It was its first rate move since November 2013.

Annual inflation in November picked up to 6.23 percent from 4.83 percent in October after the fuel price increase.

Analysts agreed the spike in inflation was a one-off, and that BI has done enough to manage it. Most expect price pressures to peak in December or January.

"Having decided to leave interest rates unchanged today, we don't think BI will be in any rush to raise rates again. We are expecting rates to remain unchanged for the whole of 2015," said Gareth Leather of Capital Economics, adding that next rate move would likely be an increase rather than a cut.

BI recently said the monthly consumer price index (CPI) would peak in December and return to normal in February, though the yearly figure factoring in the latest price rise would remain high for some time when compared with the previous year.

The central bank maintained its inflation target for 2015 of 3-5 percent.

BI is also sure that higher inflation wouldn't dampen domestic demand, which is the main driver of growth in Southeast Asia's largest economy.

The central bank expected higher economic growth of 5.4-5.8 percent, against its full-year 2014 outlook of 5.1 percent, despite low commodity prices.

The BI decision to hold rates comes as the rupiah and other emerging Asian currencies face depreciation pressure as the U.S. dollar gains on expectations that its central bank will raise rates starting around the middle of next year.

The rupiah touched its weakest level for this year of 12,365 per dollar on Monday, which was also its lowest since 2008.

The central bank has repeatedly said it is constantly doing "measured intervention" in the market to curb the rupiah's volatility, but not targeting a specific level.

Governor Agus Martowardojo said on Wednesday the central bank is comfortable with the rupiah at current levels.

Peter Jacobs, BI spokesman, told reporters on Thursday: "The rupiah depreciation is relatively low compared to other currencies." (Source : Reuters)