Bank Indonesia ups BI rate to 6%; growth expected at low end of range

By Toni Weeks

San Luis Obispo, Calif., June 13 - Bank Indonesia announced that its board of governors decided to raise the BI rate by 25 basis points to 6% from 5¾% at its meeting on Thursday. The increase was part of the bank's response to rising inflation expectations and uncertainly in global financial markets.

The bank also elected to maintain the lending facility rate at 6¾% and the deposit facility fate at 4¼%.

As previously reported, the deposit facility interest rate was raised by 25 bps on June 12 to help stabilize the rupiah exchange rate.

The bank said that the rupiah depreciated on a point-to-point basis by 0.74% in May to Rp 9.795 per dollar. Pressure on the rupiah was associated with the repositioning of financial assets from emerging markets. The bank noted that pressure on exchange rates occurred in most Asian currencies.

Indonesia's economic growth in the second quarter of 2013 is projected to be at the lower end of the earlier forecasted range of 5.9% to 6.1%. The bank attributed the noted slowdown in the global economy to the continuing crisis in Europe and a slowdown in China's economy, which restrained the growth of exports and investment, especially non-construction investment.

CPI recorded a deflation in May and was recorded at negative 0.03% month to month or 5.47% year over year, driven by volatile food deflation caused by improvement of food supply. Core inflation also stayed at a low 3.99% year over year, in line with declining global commodity prices, stable exchange rate and adequate supply-side response. But the bank said that government policy on fuel subsidy will likely raise inflation expectations, and the bank will strengthen policy coordination with the government to address this.

The bank said that the financial system stability and banking intermediation function were properly maintained, with a solid banking industry performance leading to a high capital adequacy ratio of 8.6%, well above the 8% minimum capital requirement.

On the external side, Indonesia's balance of payments in the second quarter is expected to improve, supported by a considerable surplus in the capital and financial account and despite a deficit in the first quarter. Export performance is still subdued with weak external demand and declining global commodity prices, while imports, including non-oil imports, continue to increase, the bank said.

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