Bank Indonesia Keeps Benchmark Rate on Track in Bid to Close Current-Account Deficit

JANUARY 16, 2015

Jakarta. Bank Indonesia resisted a cut to the benchmark rate to narrow Indonesia’s current-account deficit, despite easing inflation pressure in the coming months due to declining fuel prices.

The central bank kept its benchmark rate at 7.75 percent for a second consecutive month, as its sees current-account deficit to remain at 3 percent of gross domestic product by the end of this year, widening from previous estimates of 2.8 percent of GDP.

Juda Agung, executive director of Bank Indonesia’s economic and monetary policy, estimated the current-account deficit for 2014 at 3 percent of GDP.

The bank’s move was in contrast to the surprises Reserve Bank of India decision to cut the benchmark rate by 75 basis points on Thursday, amid the country’s taming inflation.

Bank Indonesia projected that inflation would decline to between 3 percent and 5 percent this year, “supported by stable core inflation and a declining international oil price that is projected to contribute to deflation,” the central bank said in a statement.

The country’s inflation accelerated to 8.4 percent in December from 6.2 percent a month earlier, after the government raised subsidized fuel prices by an average 33 percent in November.

The fuel price has since dropped by 7.6 percent on average in the beginning of January in line with declining global oil prices, as the government took the opportunity to scrap subsidizing gasoline and cap subsidy on diesel at Rp 1,000 a liter.

President Joko Widodo signaled the government would lower fuel prices to around Rp 6,400 to Rp 6,500 (50 cents) a liter over the coming months.

Additional reporting from Reuters