Indonesia holds rates ahead of fuel price hike

[JAKARTA] Indonesia's central bank kept its key interest rate steady on Thursday despite slowing growth, ahead of an expected fuel price hike by the new government that will likely push up inflation.

Bank Indonesia kept the rate at 7.50 per cent for the 12th consecutive month, in line with economists' forecasts.

Growth in Southeast Asia's top economy has been slowing from recent highs of more than six per cent, dropping to 5.01 per cent on-year in the third quarter, the weakest pace of expansion for five years.

It has been dented in part by a series of aggressive interest rate hikes last year, which were aimed at shoring up the economy after it was hit by turmoil due to the US winding down its huge stimulus programme.

However, policymakers' room to cut borrowing costs and boost growth has been limited by high inflation, which edged up to 4.83 per cent in October, and will likely surge when the government hikes fuel prices.

New President Joko Widodo, known as Jokowi, has pledged to cut huge government subsidies on petrol and diesel which gobble up some 20 per cent of the state budget, and divert the money to improving infrastructure and programmes to help the poor.

However a price rise, which is likely in the coming weeks, will push up inflation across the board due to the increased cost of transporting everyday goods.

Bank Indonesia governor Agus Martowardojo also reported on Thursday that the current-account deficit narrowed to 3.07 per cent of GDP in the third quarter from more than four per cent in the second quarter.

However analysts said that the deficit was still large, and would encourage policymakers to keep rates on hold in a bid to slow imports and further narrow the shortfall.

"A large current account deficit and an uncertain outlook for inflation mean rates are likely to remain on hold well into next year," said Gareth Leather, Asia economist from Capital Economics.

AFP