Bank Indonesia Seen Holding Rates Despite Weakest Growth in Years


FEBRUARY 16, 2015

Jakarta. Indonesia's central bank is expected to keep its benchmark interest rate steady on Tuesday, even though inflation has cooled and 2014 economic growth was the weakest in five years.

Annual inflation eased in January to 6.96 percent, from December's 8.36 percent, after domestic fuel prices slid in line with global oil prices.

And Indonesia last year had growth of just 5.02 percent, thanks to weak exports and sluggish investment.

The last time Bank Indonesia (BI) cut rates was in late 2011, and analysts do not expect it to start now.

Gundy Cahyadi, an economist at DBS Bank in Singapore, said the main barriers to a rate cut are a still-wide current account deficit and a weak currency. On Friday, BI said was deficit was 2.95 percent of GDP in 2014.

BI is wary that lower rates could encourage capital outflows, given anticipation that the Federal Reserve will start raising U.S. interest rates by mid-year.

All 20 analysts in a Reuters poll saw the benchmark interest rate being held at 7.75 percent. They also expect BI to keep its overnight deposit facility rate, or Fasbi, at 5.75 percent and lending facility rate at 8 percent.

The rupiah on Thursday hit a two-month low of 12,835 against the dollar but on Monday was trading around 12,733. It has weakened about 2.8 percent against the dollar this year.

Possible Surprise Cut

"Maintaining a tight policy bias will help to provide some underlying support to the rupiah, especially amidst the uncertainties in global financial markets," said Cahyadi, adding that BI will also keep the tight bias until the current account balance improves significantly.

While predicting a hold on Tuesday, economist Wellian Wiranto of OCBC Bank said there is scope for BI to reverse the 25 basis point hike it made in November.

"They can probably get away with it if they signal it's a one-time cut," Wiranto said.

BI made that hike - the only rate change in 2014 - after President Joko Widodo increased fuel prices, causing inflation to spike. Between June and November 2013, the policy rate was raised 175 basis points.

In November, the authorities said it plans to widen the definition of bank deposits for a regulated loan-to-deposit ratio (LDR), in a move aimed at boosting credit growth.

OCBC's Wiranto said the central bank might lower lenders' reserve requirements, currently 12 percent, by a very small amount. However, any such move "is not going to make a whole lot of difference," he said.