ASEAN KEY DESTINATIONS
As economic growth slows, BI’s monetary stance in spotlight
Bank Indonesia’s (BI) next policy move is in focus as it contributed to the country’s recent economic slowdown, as analysts attribute the central bank’s too-tight monetary policy to being behind the drop in investment and consumption.
In the third quarter, gross domestic product (GDP) growth slowed to a five-year low of 5.01 percent, with investment and consumption — two major domestic growth drivers — decelerating to a level unseen since 2009.
At 7.5 percent, the benchmark BI rate was 200 basis points “too high” given the country’s current inflation level, said ING Bank economist Tim Condon.
Last year, the BI rate was increased by 175 basis points as the central bank took measures against soaring inflation and a weakening rupiah.
The central bank has kept its key borrowing costs unchanged since November last year. Now, facing an economic slowdown and a possible spike in inflation due to looming fuel price increases, BI is scheduled to hold its board of governors’ meeting on Thursday to decide whether any adjustment in interest rate is necessary.
“With weaker GDP data, we think BI would prefer to avoid raising the BI rate even if inflation rises as a result of the upcoming fuel price increases,” said Dian Ayu Yustina, an economist with Bank Danamon.
“The modest and temporary spike in fuel price-led inflation will not necessarily be followed by a BI-rate increase as there are other challenging factors that we need to look out for,” she explained.
Indonesia’s latest GDP slowdown was caused mostly by the slump in exports, but surprisingly consumption and investment did not grow strongly enough to offset the decline.
In the third quarter, consumption and investment grew 5.4 percent and 4 percent year-on-year, respectively, compared to the second quarter’s prints of 5.6 percent and 4.5 percent.
BI’s tight monetary policy contributes to drop in economic growth, say analysts
Growth fell to 5.01%, the lowest in 5 years
Slowdown may continue in Q4, as effect of BI’s 175 bps interest rate increase last year comes with lag
As the impact of BI’s monetary policy normally comes with a lag, the slowdown in investment and consumption may still continue in the fourth quarter, with headline GDP growth likely to dip slightly below 5 percent during the period, said analysts from Mandiri Sekuritas.
“The aggressive monetary policy tightening delivered by BI in the second half of 2013, as well as the impending fuel price increases, will act as a moderating force on consumption and investment,” said Su Sian Lim, an economist with HSBC Bank.
She noted that the slowdown in investment also warranted caution, as it showed cautiousness among businesses, which refrained from making new outlays.
On the other side of the argument, however, some economists warned that cutting the BI rate to support growth might be risky, given the imminent interest rate increase in the US that could make dollar assets more attractive, triggering capital outflows from Indonesia and hurting the rupiah.
“While it is true that raising rates will have little benefit in curbing inflation and substantial penalties in terms of growth, we have to take into account the danger of capital outflows,” Bank Central Asia (BCA) economists led by David E. Sumual wrote in a note.
“If rates do not rise fast enough to retain a positive yield, a cycle of outflows and depreciation is not out of the question.”
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