Fed moves key factor for Indonesian central bank

Hong Kong

THE PACE of Federal Reserve interest rate hikes will be a key factor in whether or not Indonesia's central bank adjusts policy over coming months, deputy governor Perry Warjiyo said.

"Our communication is clear, and our signal is clear," he said in an interview in Washington. "We are holding our policy rate unchanged even though we have room for monetary easing from the domestic perspective, but we need to take into account global events such as increases in the Fed's fund rate."

The central bank left its benchmark interest rate unchanged last week as policymakers kept their focus on managing price pressures and bolstering the currency of South-east Asia's biggest economy.

Governor Agus Martowardojo and his board held the seven-day reverse repurchase rate at 4.75 per cent on Thursday, as forecast by all 24 economists surveyed by Bloomberg. The bank lowered rates six times last year, with the last move in October. "We are directing our monetary policy for stability," Mr Warjiyo said.

While consumer prices rose at a slower pace than economists predicted in March, inflation is set to pick up this year. The transmission of monetary policy is slower as banks become more conservative, the central bank said.

Slowing private consumption means that first-quarter growth is seen as being below expectations, the central bank said last week, but this was expected to pick up in the second quarter, driven by exports and domestic consumption.

Higher US interest rates impact emerging nations such as Indonesia by luring capital away and driving up the cost of US dollar borrowing.

While Mr Warjiyo is upbeat on the outlook for global growth, he said that governments should resist efforts to shrink trade imbalances through imposing new tariffs or erecting other barriers. BLOOMBERG