Bank Indonesia says it is confident inflation remains under control, prompting the central bank to hold its benchmark interest rate unchanged for a fifth consecutive month on Thursday.
The central bank kept its policy rate at 5.75 percent, the lowest in the rate’s seven-year existence, despite central banks in other countries cutting interest rates in recent months in response to signs the global slowdown may continue for some time to come.
Bank Indonesia said it decided to leave the rate unchanged because it was confident its inflation target this year of 3.5 to 5.5 percent would be met.
The consumer price index, which measures the cost of goods and services, rose 4.5 percent in June and 4.4 percent in May, the Central Statistics Agency (BPS) said.
“Bank Indonesia remains vigilant of [a] global economic slowdown that could lead to weaker export performance amid strong imports, [but] domestic demand remains strong,” Bank Indonesia said in a statement released in Jakarta after the monetary policy meeting.
Economists and analysts in Jakarta said the central bank move was in line with market expectations.
Bank Indonesia said it would continue to strengthen monetary and prudential policies. Bank Indonesia has intervened in the foreign exchange market in recent weeks to help defend a depreciating rupiah. It started selling dollar-denominated term deposits last month to help local lenders with dollar liquidity.
Bank Indonesia said slowing global economic growth coupled with the lingering euro-zone crisis could pose a problem for Indonesia. The slowdown could reduce demand for Indonesian commodities such as rubber and coal.
International Monetary Fund managing director Christine Lagarde said in Jakarta this week that Indonesia faced an economic “cloud” ahead this year.
As a result of similar fears, Bank Indonesia cut its economic growth forecast for Indonesia this year to between 6.1 and 6.5 percent from the original range of 6.3 to 6.7 percent.
Still, Bank Indonesia forecasts inflation rising in the coming weeks ahead of the late August Idul Fitri celebration that marks the end of the Muslim holy month of Ramadan. Indonesians typically buy durable goods during the period, which may trigger prices to rise. Bank Indonesia said it forecast economic growth to hit 6.3 percent in the year’s third quarter.
Economic growth in Indonesia relies on private consumption, which accounts for about two-thirds of the country’s $813 billion economy.
Purbaya Yudhi Sadewa, an economist at Danareksa Sekuritas, said lending growth would help boost economic growth.
“Bank Indonesia has some room to make the banks’ interest rates more effective without changing the key rate,” Purbaya told the Jakarta Globe on Thursday.
Bank Indonesia, which has been encouraging the country’s lenders to improve efficiency, forecast overall lending to grow 24 percent this year.
Purbaya said he maintained his forecast that the country’s economy would expand 6.3 percent this year.