Indonesia holds BI rate steady at 5¾%, targets short-term inflation

By Toni Weeks

San Diego, May 10 - Bank Indonesia announced that its board of governors decided at a meeting on Thursday to maintain the BI rate at 5¾%.

The board said that inflationary pressure going forward is expected to remain contained, as seen in the bank's price monitoring survey the second week of May, which shows lower inflation than the historical average.

Inflation picked up in April, however, driven mainly by volatile food inflation. Year-over-year core inflation was maintained at 4.2%, supported by adequate supply to higher domestic demand, lower global commodity prices and improved inflation expectation. Year-over-year CPI inflation was 4.5%, higher than the previous month's. The bank stated it is confident that inflation in 2012 and 2013 can be controlled toward the target range of 4.5% plus or minus 1%.

The rupiah weakened with reduced volatility in April, depreciating by 0.27% month to month to Rp 9.166. Pressure on the rupiah was associated with high imports in line with strong domestic economic activities as well as with global economic uncertainty. Going forward, the rupiah is expected to remain stable or to appreciate, supported by the surplus in Indonesia's balance of payment.

In the first quarter of 2012, the Indonesian economy grew by 6.3%, which was lower than the bank had estimated. But economic growth remains strong, supported by strong private consumption and investment. The board expects economic growth to remain strong, despite global economic slowdown, and is expected to be 6.3% to 6.7% for the year.

The bank also said that financial system stability is well maintained with improving intermediation function to support economic financing.

The bank said it will continue to focus on managing short-term inflation and rupiah stability. To do so, it plans to raise the interest rate of monetary operation instrument and to continue to absorb rupiah excess liquidity. Medium- to long-term interest rate structure is expected to pick up, which will make investment in domestic securities more attractive.

The board, in coordination with the Coordinating Ministry for Economic Affairs and the Ministry of Home Affairs, will hold the third regional inflation control team national coordination meeting, which will be attended by all governors and stakeholders and will enhance coordination to maintain price stability.

A complete report of the meeting that presents macroeconomic developments and monetary policy will be published in the Monetary Policy Report and accessible on the bank's website.

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