Date of publication: 13/02/2013
Bank Indonesia (BI) on Tuesday kept the benchmark rate unchanged at the record low of 5.75 percent on the back of optimism about manageable inflation and a more stable rupiah after the introduction of the new system for onshore quote.
The central bank has the benchmark at this level now for 12 months. The last reduction in the rate, 25 basis points from 6 percent, was in February of last year.
"The current interest rate is considered consistent with manageable inflation based on our target range of 4.5 plus minus one percent in 2013 or 2014," said BI spokesperson Difi Johansyah on Tuesday.
Monthly inflation picked up to 1.03 percent in January, the highest level in four years, such as poor weather conditions and flooding food shortages in many areas.
Higher-than-expected inflation in January was not problematic and inflation remained on target, BI Governor Darmin Nasution told reporters last week.
Inflationary pressures in January was a matter of business fluctuations, only and not a structural problem in the economy, he said, citing a low contribution of core inflation during the month (0.22 percent).
Analysts fear that inflation rates in the coming months as the impact of gradual increases in electricity rates and the rise in the minimum wage strokes can creep into the economy.
"Our baseline scenario assumes that the interest rate hikes later in the year, as growth remains on a steady job and inflation expected to heat up," wrote Fred Gibson, a Sidney-based associate economist with Moody's Investors Service, in a report distributed earlier this week.
BI repeated that it would remain in the market to the rupiah. The new onshore quote system the rupiah will add liquidity to the market by foreign exchange (forex) and support for rupiah stability.
The central bank announced last week that it would allow local banks a time to quote rupiah spot price for the dollar. The new quote system can promote a credible benchmark rate for the rupiah and guard the currency against speculation.
The introduction of BI's new quote system was a response to positivity in the local currency market, with the rupiah have risen for three consecutive days since the announcement of policy, hitting the strongest level in three months of 9,603 earlier this week.
The rupiah ended their three-day Bull streak on Tuesday, 0.3 percent to 9,644 in Jakarta, prices of local banks compiled by Bloomberg Show.
On Tuesday, BI also held the deposit facility (Fasbi) remained unchanged at 4 percent, 175 basis points lower than the BI, although economists believe the central bank are BI-rate in the short term the rupiah will raise.
Citibank Indonesia Economist Helmi Arman predicts a 25-basis point increase in Fasbi rate at the end of February as BI tries to push the rupiah against future arising from Indonesia's current account deficit.
"We have the view that every step on the Fasbi rate probably a reaction to the pressure on the rupiah, which in turn rely heavily on the market sentiment will is," he said Tuesday.
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