Indonesia, a
consumption-driven economy, may see another downturn in economic growth after Bank
Indonesia (BI) started a liquidity tightening campaign on Thursday by raising
its key interest rate to contain inflation and stabilise the rupiah.
The central bank’s decision to push up the interest
rate would help halt the fall in the rupiah, which has been under pressure amid
the withdrawal of foreign funds from the bond and equity markets in the last
several days.
Bank of America Merrill Lynch economist, Hak Bin Chua
said on Thursday the higher interest rate would prevent the rupiah from further
fall.
However, the liquidity tightening would hurt
investment and domestic demand, which would in turn affect economic growth,
Chua added.
BI Deputy Governor Perry Warjiyo acknowledged the new
policy rate would drag down the GDP growth. “Following the hike, the tendency
will be for our full-year economic growth to head toward 6.1 per cent,” Perry
told reporters after the central bank’s monthly board of governors meeting.
The government proposes to revise down its growth
target to 6.3 per cent, from 6.8 per cent in the 2013 State Budget.
The central bank has recently been under pressure to
increase the interest rate to help contain inflation and reverse the weakening
trend of the rupiah. BI has estimated that annual inflation might top as high
as 7.8 per cent this year — well above its target of 5.5 per cent — while
earlier this week the rupiah weakened below its psychological level of 10,000
per US dollar. Despite the increase in the interest rate, rupiah fell 0.3 per
cent to 9,887 on Thursday, prices from local banks compiled by BI in the
Jakarta Interbank Spot Dollar Rate (JISDOR) show.
Representatives from the business community said that
the decision by BI’s newly appointed Governor Agus Martowardojo to raise the
key interest rate signaled a possible end of the low interest rates regime
championed by former central bank governor Darmin Nasution.
“Banks will soon adjust to the policy by increasing
their credit interest rate, and this will affect our business by creating
additional costs,” said Sofjan Wanandi, the chairman of the Indonesian
Employers’ Association (Apindo).
Credit Suisse economist Robert Prior-Wandesforde
argued that the move signaled that BI, under Agus’s leadership, might be
shifting gears into hawkish, a term coined for a central bank prioritising
stability rather than economic growth.
“The big question [...] is whether the same actions
would have been taken by the previous BI Governor,” he wrote in a research
note.
Meanwhile, Finance Minister Chatib Basri shared a
different view, saying that 25 basis points of BI rate hike “will not affect
much” of the economic expansion. In contrast, it would help contain
inflationary pressure, eventually leading to stronger household consumption, he
said.
Chatib recently acknowledged that the 6.3 per cent
growth target would need “extra efforts” to achieve, citing the fact that
Indonesia expanded only by 6 per cent in the first quarter this year, its
slowest pace in two years.
He predicted that the market “will respond positively”
to the BI rate hike. “A fair increase in interest rate will not significantly
lower our investments – in fact, it is good to instill confidence so that the
foreign direct investments keep flowing in,” the minister wrote in a text
message on Thursday.
The Jakarta Composite Index fell by 1.92 per cent on
Thursday to close at 4,607.66, erasing the previous day’s increase to end at
the lowest level since February. The index has lost 11.6 per cent since its
highest level on May 20.
Raras Cahyafitri also contributed to this story
Satria Sambijantoro and Linda Yulisman
The Jakarta Post
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