Indonesia holds rate steady as C/A deficit widens

    Indonesia's central bank held its benchmark BI rate steady at 7.50 percent, as expected, repeating that its current policy stance is consistent with efforts to steer inflation toward its 2014 and 2015 targets and to lower the current account deficit to a more healthy level.
    Bank Indonesia (BI) has maintained its rates since November 2013 after raising them by 175 basis points last year in response to inflationary pressures, a depreciation of the rupiah currency and a wide current account deficit.
    BI said its aim of achieving a more balanced economy was reflected in the downward trend in demand and inflation while the current account deficit increased more than expected in the second quarter, partly due to seasonal patterns.
    However, BI also pointed to a number of external and domestic risks that it said may interfere with it reaching its inflation target and goal of improving the current account.
    "Looking ahead, there are a number of global risks that we need to be wary of, among other things, the normalization of Fed policy and the Bank of England, and the risk of spillovers and spillback from the weakening economy of emerging markets," BI said.

    Among the domestic risks is moderate economic growth, particularly the decline in domestic demand though exports have improved.
    BI maintained its forecast for the economy to expand between 5.1 and 5.5 percent this year, below growth rates of above 6 percent from 2010-2012. In 2013 the economy expanded by 5.8 percent.
    In the second quarter of this year, Indonesia's Gross Domestic Product expanded by 2.47 percent from the first quarter but compared with the second quarter of 2013, the growth rate eased to 5.12 percent from 5.22 percent, continuing the trend of declining growth. The slowdown was due to weak exports of natural resources, such as coal, palm oil and minerals.
    Indonesia's second quarter current account deficit widened to US$9.1 billion, or 4.27 percent of GDP, from $4.2 billion, or 2.05 percent of GDP in the first quarter, but narrowed from a deficit of $19.1 billion, or 4.47 percent of GDP, in the second quarter of 2013.
    Earlier this year, the central bank had forecast the current account deficit would narrow to below 3 percent of GDP from 3.3 percent in 2013.
    "The increase in the non-oil trade balance surplus has not been able to offset the increase in the oil and gas trade balance deficit," BI said. Exports of commodities to emerging economies have slowed while exports of manufacturing goods, such as automotive, textile and apparel, to developed countries, had increased. Imports of consumer goods and oil had risen.
    The surplus in the capital and financial accounts rose substantially in the second quarter due to high inflows of portfolio investment from foreign investors, pushing up the country's foreign exchange reserves to $110.5 billion, or the equivalent of 6.4 months.
    Indonesia's inflation rate fell sharply to 4.53 percent in July from 6.7 percent in June, supporting the central bank's aim of reducing inflation to 4.5 percent, plus/minus one percentage point, in 2014 and its 2015 goal of 4.0 percent, plus/minus one percentage point.
    Among the risks, BI noted increases in administered prices, such as electricity tariffs and food.
    The rupiah currency weakened by 4.18 percent in the second quarter of this year to 11,855 per U.S. dollar from the second quarter of last year, BI said. Today, the rupiah was trading at 11,669 to the dollar, up from 12,160 at the start of the year.

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