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'Indonesia might raise interest rates’ SINGAPORE - Pressure is growing on the Indonesian central bank to raise interest rates and defend a battered rupiah. Worried about stifling economic growth, the Indonesian central bank has so far relied on dollar-selling and verbal intervention to stem the rupiah’s decline, suggesting as recently as last week the currency could rally to 9,000 per dollar this year because of strong economic fundamentals.

The rupiah, which fell to a three-year low of 9,800 per dollar on Tuesday, has lost 4.7 percent this year, making it Asia’s worst performing currency. That followed a 9.5 percent drop in 2004, even as other Asian currencies rose. “They’ve tried moral suasion, they’ve tried market intervention. This time they may have to rely on interest rates,” said James Malcolm, Asian currency strategist at Deutsche Bank in Singapore. US investment bank Goldman Sachs has called for an one-shot one percentage point rise in the key interest rate, while Standard Chartered Bank has been urging Bank Indonesia to get more aggressive, saying the central bank’s quarter-point rise earlier in April was not enough to curb inflationary pressures.

Bank Indonesia’s monetary policy was too loose and was causing local investors to take money out of the country, Goldman said in a recent report. It said foreign investors may join Indonesians in the capital flight by dumping stocks and bonds if the central bank failed to raise the rate further. Jakarta’s key stock index has lost 12 percent since hitting a record high on March 22. Currency conundrum: Bank Indonesia Governor Burhanuddin Abdullah has a tough balancing act to perform.

Consumer price inflation in Southeast Asia’s biggest economy jumped to a two-year high of 8.8 percent in March, exceeding its 7 percent full-year target, after the country raised fuel prices. Sin Beng Ong, economist at JPMorgan, said the inflation rate could soar to 11 percent this year, partly because the weaker rupiah is making imports more expensive. Inflation reached 6.4 percent last year. Yet, raising the rate further, in a bid to defend the rupiah, could choke off a resurgent economy at a time when high oil prices, crop failures due to dry weather and slowing overseas demand were clouding Southeast Asia’s economic outlook.

Indonesia’s economy could grow between 5.5 and 6.0 percent this year, Abdullah said on April 12. That would make it the only Asian economy where growth is likely to exceed the pace of 2004. “They’re torn,” said Ong. “They’d rather see a weaker currency than higher rates. They want to see strong growth.” Another blow to the rupiah: Indonesia’s crude oil imports began to exceed its exports last year as oil prices were rallying to record levels. Oil purchases by state-owned oil company PT Pertamina and state power companies have worsened the country’s balance of payments.



Posted in Economy @ 27 April 2005 00:01 CET by Jeroen · 'Blog' RSS feed · permalink






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