IMF, World Bank Economists See BI Standing Ground on Benchmark Rate


FEBRUARY 11, 2015

Jakarta. Indonesia’s central bank is likely to maintain a tight-bias policy this year despite an easing in inflation amid a global economic slowdown.

But external risks such as an imminent policy rate hike by the US Federal Reserve later this year, will still keep Bank Indonesia on edge for the time being, said Benedict Bingham, the International Monetary Fund’s representative in Indonesia.

“[The tight-bias policy] is more about managing external risks,” Bingham told GlobeAsia in Jakarta on Wednesday.

Bank Indonesia has raised its policy rate by 200 basis points to 7.75 percent since June 2013, pledging to anchor inflation as well as manage the country’s ballooning current-account deficit.

Annual inflation eased to 6.96 percent in January, from 8.6 percent 18 months earlier. The country’s trade deficit narrowed by half to $1.89 billion last year from $4.08 billion in 2013.

Bingham said there was a small chance that Bank Indonesia might loosen its interest rate policy as central banks around the world shift their stance toward a monetary stimulus.

The central banks of India and Australia lowered their benchmark interest rates earlier this month, hoping to spur growth. Previously, the European Central Bank and the Monetary Authority of Singapore also lowered their rates.

“Globally, things are shifting. Monetary policies are generally moving toward an easing policy,” Bingham said.

“If that reflects a permanent shift in inflation expectation globally, and not just because the declining oil prices, maybe that reduces some of the external risks.”

That sentiment was echoed by Rodrigo Chavez, the director of the World Bank’s Indonesian office, who also praised the central bank for its monetary policy.

“My personal sense is that the decrease in oil prices is conducive for them not to consider tightening the monetary policy further,” Chavez said.

The bank will hold its monthly governors’ meeting on the policy rate next Tuesday, with economists from Bank Mandiri, Indonesia’s largest lender, and Singapore-based DBS expecting the central bank’s benchmark rate to stand pat at 7.75 percent.

DBS said in a note to clients that about half of Indonesia’s current-account deficit was still financed by portfolio inflows, and the central bank “may prefer to keep its tight policy bias until we see a more significant narrowing of the current account  deficit.”