Bank Indonesia keeps BI rate at 6½%; CPI inflation 'soars' in July

By Toni Weeks

San Luis Obispo, Calif., Aug. 15 - Bank Indonesia's board of governors decided at its meeting on Thursday to keep the BI rate at 6½%, according to a bank notice. The bank last changed the BI rate in July, increasing it by 50 basis points from 6%. Also in July, the bank increased the lending facility by 50 bps to 4¾%.

The bank said that CPI inflation soared in July to 3.29% month to month, or 8.61% year over year, well above June's inflation rate and the bank's projections. The increase was caused by skyrocketing inflation of volatile foods. Core inflation, despite a moderate increase, remained under control. The bank said that inflationary pressures are expected to ease after Ramadan ends and the academic year begins. Slower domestic economic growth will also help return inflation to its target range.

The economic slowdown, to 5.8% year over year from 6% in the first quarter, is part of rebalancing the domestic economy with the global economic downturn and the impact of rising inflation, the bank stated. Exports, although growing, remain insufficient to boost economic growth. Coupled with weaker purchasing power due to rising inflation, lukewarm exports have slowed household consumption and non-construction investment. The bank currently projects economic growth in 2013 to decelerate to the lower end of the 5.8% to 6.2% range and to the range of 6.4% to 6.8% in 2014.

Likewise, the 2013 global economic growth is predicted to decrease, with the latest estimation at 3.1%, down from the original projection of 3.2%. The revision was derived by the slower growth of emerging market countries, mostly China and India, and the decline of most global commodity prices other than oil prices.

In July the rupiah exchange rate depreciated, the bank noted, sliding 1.95% month to month to Rp. 10,071 per dollar. The bank said that it expects the downward rupiah trend to support expedited external rebalancing and catalyze healthier economic growth.

According to the announcement, the bank plans to strengthen its policy mix by optimizing monetary and macroprudential policy instruments to curb inflation and maintain a more sustainable balance of payments as well as overall financial system stability. In order to direct inflation in 2014 in line with its inflation target range of 4.5% plus or minus 1%, the bank will take on the following strategies:

• Continue to conduct monetary operations to absorb rupiah excess liquidity that tends to increase after Ramadan by issuing Bank Indonesia deposit certificates;

• Conduct long-term rupiah exchange-rate stabilization;

• Conduct supervisory actions to control a relatively high credit growth in several banks and specific sectors, including those with high import contents; and

• Improve several policies to develop the domestic foreign exchange market and effectively increase forex supply.

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