Indonesia Raises the Benchmark Interest Rate to 6%

The Bank Indonesia decided on June 13th to increase the key interest rate by 25 basis points to 6 percent in order to to boost confidence on depreciating Rupiah and head off a rise in inflation expected after cutting fuel subsidies.
Bank Indonesia | Duarte Ricardo | 6/13/2013 11:23:50 AM
Excerpt from the statement by the Bank Indonesia:

The policy was part of Bank Indonesia’s policy mix to response pre-emptively to rising inflation expectations and to maintain macroeconomic stability and financial system stability amid increasing uncertainty in global financial markets. 

Indonesia’s economic growth in the Q2-2013 is projected to be biased downward to the lower bound of earlier forecast range of 5.9%-6.1% amid the slowdown in the global economy. These conditions restrained the growth of exports and investment, especially non-construction investment. 

From the external side, Indonesia's balance of payments in the Q2-2013 is expected to improve. This improvement is supported by a considerable surplus in the capital and financial account, despite a deficit in the Q1-2013. Yet, current account deficits in the Q2-2013 is expected to be higher than that in Q1-2013. Export performance is still subdued with weak external demand and declining global commodity prices, while imports continue to increase. 

Rupiah depreciation pressure increased in May 2013, associated with reposition of financial assets from emerging markets in line with the possibility of monetary policy adjusment by the Fed and negative sentiment toward domestic fiscal and current account deficits.

Consumer Price Index in May 2013 recorded a deflation in the midst of rising inflation expectation. CPI in May 2013 was recorded at -0.03% (mtm) or 5.47% (yoy). Core inflation also stayed at a low level (3.99%, yoy). However, Bank Indonesia observes rising inflation expectation in anticipating Government policy on fuel subsidy. Administered prices are rising, triggered by second-phase of electricity tariff hike and distruption on the supply of LPG.

Indonesia Raises the Benchmark Interest Rate to 6%