Indonesia's central bank to keep policy rate on hold, eye on data

JAKARTA: Indonesia's central bank is expected to keep its benchmark policy rate on hold on Thursday as the distress from a weak rupiah and wide current-account deficit eases.

Bank Indonesia has set itself apart from other central banks among the "Fragile Five" economies as it has not raised rates this year to fend of selling during the recent emerging markets rout. India, Turkey, Brazil and South Africa have raised rates to bolster their economies.

That is because Indonesia's worryingly large current-account deficit has narrowed and inflation has moderated, taking some pressure off the rupiah that had the ignominy of being Asia's worst performing currency last year.

Ten out of 11 analysts in a Reuters poll estimated Bank Indonesia (BI) would hold its key reference rate unchanged at 7.50 percent due to more stability in the exchange rate and better-than-expected trade data. Wide current-account deficits since the final quarter of 2011 have made Southeast Asia's largest economy vulnerable to heavy portfolio fund sell-offs.

"We cannot completely rule out a further policy rate hike this year (we still expect a further 25 bps increase). But for this month, we think BI will want to allow more time for recent changes in its policy mix to be further passed through," said Helmi Arman, economist at Citi.

The rupiah is up about 0.5 percent against the dollar so far this year, after plunging more than 20 percent in 2013. The poll also forecast the central bank would keep the deposit facility rate (FASBI) and lending facility rate at 5.75 percent and 7.50 percent, respectively.

Indonesia, one of the first emerging countries to tighten its monetary policy, has lifted its reference rate by 175 basis points since June to shore up the ailing rupiah on worries over the Federal Reserve's stimulus reduction and the country's ability to fund the economy.

With the prospect of a worsening trade balance from an export ban on minerals, higher spending on elections and rising prices, some analysts see the possibility of a hike in rates in the coming months to keep the economic recovery on track.

Bank Danamon's economist Dian Ayu Yustina said the next interest rate increase will be dependent on data and its impact on the rupiah.

"The risk is that policy may be biased to being reactive rather than pro-active," said Prakriti Sofat, economist at Barclays who sees a 25-basis-point hike in March as BI tries to fund the country's current-account deficit. Indonesia is expected to produce a narrower current-account deficit in the final quarter of 2013, as the trade balance was in surplus of around $2 billion in October-December.

Bank Indonesia will announce balance of payments data on Friday.