While Brazil surprised the markets with a bigger-than-expected interest rate cut, South Korea and Indonesia on Thursday delivered exactly what had been predicted.
The Bank of Korea and Bank Indonesia both left rates unchanged – in a clear sign that concerns about the impact of rising oil prices on inflation are matching worries about the threats to global growth coming from the eurozone. It’s a striking shift for Indonesia, which has – like Brazil – been a standard-bearer for aggressive pro-growth rate cuts.
Bank Indonesia today became the latest emerging market central bank to confound analysts by cutting rates.
Darmin Nasution. Image by Getty.
Darmin Nasution, Indonesia’s central bank governor, cited fears of the global outlook as the reason for the cut, echoing his counterparts in Brazil, Turkey and Israel.
As this post explains, emerging market central banks are now likely to interpret their inflation-fighting mandates far more loosely than before the crisis so they can adjust policy if financial stability appears threatened.
How can analysts adjust their expectations so that they stop getting it so wrong? Read more
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The Federal Open Market Committee’s minutes are out on Wednesday for its late September meeting, where the majority backed Operation Twist, at 14.00 DC time (18:00 GMT). Read more
Next week sees a host of central banks vote on monetary policy.
The Reserve Bank of Australia’s board is expected to hold rates on Tuesday. On Wednesday Sweden’s Riksbank, the National Bank of Poland, the Bank of Japan and the Bank of Canada are all set to vote. Read more
To discourage volatile short-term capital flows, the Bank of Indonesia will extend the minimum holding period of its bank certificates, SBIs, from one month to six months, effective May 13. This means traders holding the notes will not be able to sell them in the secondary market until they have held them for six months.
The unexpected news builds upon previous measures aimed at slowing down investment in very short-term debt. For example, the Bank of Indonesia has already all but stopped issuing 3- and 6-month SBIs. A key risk for countries receiving increased capital inflows is that they might reverse, which could have sudden and unpredictable consequences, as the Bank of Japan has pointed out. The Bank of Israel’s Stanley Fischer has made the same argument. Read more
Indonesia has held rates after tightening them for the first time since 2008 at its last meeting – but said this should not be interpreted as a change of direction. “This decision does not change the direction of Bank Indonesia’s monetary policy that is tending to be tight to manage high inflationary pressures,” said the Bank.
Inflation in south-east Asia’s largest economy is above target but falling. Prices rose by more than 7 per cent in the year to January. This fell to 6.84 per cent in the year to February, and the head of Indonesia’s statistics body sees March inflation at a similar or lower level. The target is 5 per cent +/- 1 per cent.
Bank Indonesia has taken the “last option”, raising its policy rate today by a quarter of one per cent, taking the policy rate to 6.75 per cent. It is the first rate rise since September 2008. Food price pressure was given as the main reason for the move.
The central bank indicated in mid-January that it would be prepared to increase rates, but said the timing would depend upon the success of other measures to reduce liquidity, such as raising reserve requirements. Deputy governor Hartadi A. Sarwono repeated last week that a rate hike was a possibility, but said it would be the last option. Read more
Thailand, Indonesia and India have all made bullish noises of late, suggesting they may raise rates in the near future.
Indonesia’s central bank governor said today that it remained vigilant against rising inflationary pressures, which is good to know from a bank that has been keeping at least one eye firmly on growth. Consumer price inflation rose to 6.96 per cent in the year to December, against a 2011 target of 5 per cent +/- 1 per cent. The central bank has kept rates at their post-crisis low of 6.5 per cent to drive growth via commercial loans, Reuters reports. The IMF has called on the country to raise rates, which recently cut import duties on food to try to dampen price rises.
India is expected to raise rates next Tuesday, January 25. A “vast majority” of Read more
Indonesia’s inflation is running 2 percentage points above target and 1 point above tolerance, but the central bank has still decided to keep rates on hold.
Consumer prices rose 6.96 per cent in the year to December, well above the 2010 target of 5 per cent ± 1 per cent. Bank Indonesia will not want to encourage further inflationary capital inflows by raising rates, but while rates are kept at the record low of 6.5 per cent, consumers are encouraged to borrow and spend. Read more
The acting head of the Bank of Indonesia has been formally confirmed as its new governor, after facing tough questions from the House of Representatives on tax fraud. Read more