Governor of the central bank of Indonesia (Bank Indonesia) Agus Martowardojo said that the central bank will respond to current market conditions on Thursday (29/08). Bank Indonesia will have an extra board meeting to discuss measures to safeguard Indonesia's financial stability. It will touch matters such as macro-prudential policy, the interest rate and currency control. Normally, the central bank meets once per month but Martowardojo felt that this extra meeting is needed as the next scheduled meeting (12/09) is too far away.
Martowardojo also said that the central bank's initial optimistic inflation forecast of around 8 percent (full-year 2013) can most likely not be met. The bank now assumes inflation to rise to between 8.6 percent and 9.2 percent at the year-end. According to Martowardojo, volatile food prices (beef, chicken meat and onions) as well as imported inflation (due to the weakening rupiah) are a serious concern. However, he also stressed that Indonesia is not in a crisis situation and that most regional emerging economies find themselves in similar positions.
Market participants assume that the bank will raise its benchmark interest rate (BI rate) during tomorrow's meeting in order to support the rupiah and combat higher inflation. Currently, the BI rate is 6.50 percent but it may be raised by 25 to 50 basis points tomorrow. The overnight deposit facility rate (FASBI) is expected to be raised 25 to 100 basis points. In June and July, the central bank had already raised interest rates, but left them unchanged in August in order to support economic growth which has been slowing down in recent quarters. During the August meeting, the bank did lower the upper band of the loan-to-deposit ratio in order to limit lending.
The rupiah is now on its weakest level since April 2009.
With regard to Indonesia's widening current account deficit and its weakening rupiah, S&P Asia-Pacific Chief Economist Paul Gruenwald mentioned in a report titled South and Southeast Asian Economies Grapple with Growth and External Financing Risks: “Growth will eventually slow enough so that it curbs imports and the current account corrects; and the currency will eventually fall far enough to spur exports while foreign investors seeing a bargain [including remittances and investments from overseas nationals] will come back in.”