Indonesia likely to hold rate at record low
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Indonesia's central bank, Bank Indonesia (BI), yesterday left its overnight benchmark rate unchanged at 5.75 per cent amid rising inflation and a weak rupiah.
Inflation rose to 4.53 per cent in June year on year from 4.45 per cent in May, but remained within the target range set by BI of 3.5 per cent and 5.5 per cent.
“BI decided to keep its rate at 5.75 per cent. In our view, this rate is consistent with current low inflation, which is still within our range,” said governor Darmin Nasution.
Despite concerns that the global slowdown would further weaken demand for Indonesian exports, the bank chose not to slash the rate as the rupiah is weak, having fallen more than nine per cent in the last 12 months.
BI said the slowdown had already begun to affect Indonesian trade.
The rupiah has weakened against the dollar by more than 4 per cent so far this year, the second-worst performing currency in Asia.
“On the other hand, inflationary pressures are high due to the new academic year in July and Ramadhan in August,” Sugandi added, echoing BI’s policy dilemma.
Indonesia's broad money supply in May rose 20.9 per cent to 2,992.06 trillion rupiah (US$317.158 billion) from a year ago, reflecting a 2.2 per cent increase on a monthly basis, according to BI data.
BI could use other tools than just the BI rate to absorb money in circulation and keep inflation in check, analysts have said, citing increasing interest rates applied to idle money that commercial banks leave with the central bank.
