Indonesia central bank: rate hike not first choice at this juncture

JAKARTA (Reuters) – An interest rate hike will not be Bank Indonesia’s first choice at this juncture, the central bank’s deputy governor told the Reuters Global Markets Forum on Friday, even as the country’s headline inflation rate rose to a 7-year high.

“We have room to increase the policy rate … But at this juncture, I think we will not put this as a first choice in our policy sequence,” Dody Budi Waluyo said in an interview.

Indonesia’s headline inflation rate rose to 4.94% in July, above Bank Indonesia’s (BI) 2% to 4% target range, but core inflation rate remained within target at 2.86%.

Calls for a rate hike have also gathered pace after data earlier this month showed Southeast Asia’s largest economy grew 5.44% on an annual basis in the second quarter, more than expected.

BI is set to hold its monthly policy review on Aug. 22 and 23.

Waluyo said BI will work with the government to address supply issues that had pressured consumer prices, adding: “We will not let headline inflation go up”.

He also repeated that BI will only raise rates when it sees a persistent rise in core inflation.

BI is one of very few Asian central banks that has not lifted its benchmark rate from a record low of 3.50%, as earnings from commodity exports have shored up Indonesia’s economic resilience.

Indonesia is in a better place to navigate current financial market volatility amid a global monetary tightening and rising geopolitical tensions, Waluyo said.

He defended BI’s policy normalisation measures, saying it was not behind the curve as it had moved to tighten liquidity in the financial markets.

He added that as host of the Group of 20 major economies, Indonesia hopes tension in the Taiwan Strait does not derail discussions and efforts to accelerate economic recovery from the COVID-19 pandemic.

(Reporting by Divya Chowdhury; Additional reporting by Stefanno Sulaiman; Writing by Gayatri Suroyo; Editing by Kanuprya Kapoor)