Indonesia Holds Key Rate For Sixth Month Amid Rupiah Weakness, High Inflation

(RTTNews) - Indonesia's central bank on Tuesday left the key interest rate unchanged for the sixth straight month in line with its efforts to rein in inflation within its target range, and said it is focused on stabilizing the rupiah exchange rate.

The Board of Governors decided to hold the BI Rate at 7.50 percent, the Bank Indonesia said in a statement. The move was in line with economists' expectations. The deposit facility rate was kept at 5.50 percent and the lending facility at 8.00 percent.

"The decision is consonant with efforts to control inflation within the target corridor of 4±1% in 2015 and 2016. In the short term, Bank Indonesia is focused on efforts to stabilize the Rupiah amid uncertainty in the global economy, by optimizing monetary operations in the Rupiah and foreign exchange market," the bank said.

The bank expects domestic growth to rebound in the second half of the year. Indonesia's annual economic growth eased to 4.67 percent in the second quarter from 4.72 percent in the previous three months, as government spending slowed and the cautious approach of foreign investors led to a slump in construction investment. Export growth was also moderate.

Data released earlier on Tuesday confirmed the weakness in exports. Annual declines in both exports and imports during July was much worse than economists had predicted. Exports fell 19 percent and imports plunged 28 percent.

The central bank partly attributed the recent weakness in the rupiah to the market reaction to the yuan devaluation in China. The bank said it has intervened in the market and will continue to do so to stabilize the domestic currency.

Bank Indonesia also expects to attain its inflation target of 4±1 percent through policy coordination to control inflation centrally and locally. Headline inflation was 7.26 percent in July.

"Looking ahead, with inflation set to drop back sharply later in the year, we expect to see some policy loosening before the end of 2015," Capital Economics Asia Economist Gareth Leather said.

"However, worries about the outlook for the rupiah mean interest rates are likely to remain elevated for some time."