Indonesia Seeking to Avoid Rate Rise, Governor Nasution Says

Sept. 7 (Bloomberg) -- Indonesia’s central bank chief said he wants to avoid increasing interest rates, counting on lending and reserve rules for banks to contain inflation and stoke growth in Southeast Asia’s biggest economy.

“As long as we still can manage our monetary variables by other instruments, we will try to avoid changing the interest rate,” Governor Darmin Nasution said in an interview in Jakarta. By raising the amount banks must hold in reserve and setting loan-to-deposit ratio guidelines, officials can bolster economic expansion and keep consumer price gains within target, he said.

Nasution’s comments late yesterday indicate Indonesia isn’t ready to join Asian counterparts in raising borrowing costs from world-recession lows as the region leads the recovery. At stake is reining in a 16-month high inflation rate that’s eroding purchasing power in the world’s fourth most populous nation.

“We see greater risk of delayed hikes” in rates, Citigroup Inc. analysts Johanna Chua and Brian Tan said in a report after Bank Indonesia left its benchmark at a record-low 6.5 percent on Sept. 3. “Recent policy action is a bit of a mixed bag, more hawkish on the reserve requirement, but downplaying the need to adjust rates.”

Bank Indonesia has kept the main rate unchanged for more than a year as President Susilo Bambang Yudhoyono has focused on bolstering growth, targeting an average 6.6 percent annual expansion rate through the end of his term in 2014.

Faster Growth

Nasution, speaking in his office in his first interview since assuming the post this month, said gross domestic product may climb by 6.2 percent this year, in part as banks bring their loan portfolios into line within the new ratio guidelines. Growth has met or exceeded that pace only once since 1996, according to the International Monetary Fund.

He also predicted that consumer prices, which surged 6.44 percent in August from a year before, will rise within BI’s 4 percent to 6 percent target range in 2011 as liquidity is mopped up by a boost in banks’ reserve requirements.

Indonesia’s Jakarta Composite Index of stocks has gained 34 percent in dollar terms so far this year, outstripping the 2.5 percent advance for the MSCI Emerging Market Asia Index, as economic growth picked up.

The rupiah has risen 4.5 percent against the U.S. currency in that time, the third-best performer in Asia outside Japan, behind Malaysia and Thailand, which have both raised rates.

Policy Outlook

“In the past we rarely used the reserve requirement in our monetary policy,” said Nasution, 61, who headed the country’s tax office before joining the central bank as a deputy governor last year. Going forward, “our response will not only be the interest rate. We will often use the reserve requirement.”

The central bank said last week lenders will be required to set aside 8 percent of their deposits as primary reserves starting Nov. 1, from 5 percent previously.

Bank Indonesia also said it will introduce in March an additional reserve requirement that’s linked to the share of funds that a lender gives out in loans. Officials will impose a penalty on banks whose loan-to-deposit ratio is below 78 percent or more than 100 percent.

When Bank Indonesia determines liquidity is at a desired level, it will return 2.5 percentage points of the additional 3 percentage points of primary reserve requirement to the lenders, it said last week.

Beating Expectations

Indonesia’s $540 billion economy expanded at a faster-than- projected 6.2 percent pace in the second quarter as investment rose. Stronger growth has helped boost profit at companies including builder PT Wijaya Karya and PT Bank CIMB Niaga.

Bank Indonesia estimates bank lending this year may rise about 13 percent to 20 percent, based on the current volume of loans being made, Nasution said. Larger credit expansion is needed to support economic expansion of 6.2 percent, he said.

“We will monitor the lending rate of banks,” he said. “We need lower lending rates to encourage credit growth,” Nasution added, referring to the cost of loans.

The country’s inflation accelerated in August as the world’s most populous Muslim nation observed the fasting month of Ramadan and families began preparations for the Eid-ul-Fitr celebration. Higher electricity costs also boosted prices.

Consumer prices may climb by more than the central bank’s target of 4 percent to 6 percent this year, Nasution said last week.

Elsewhere in the region, Malaysia left rates unchanged last week after three increases this year. The Bank of Thailand raised its benchmark on Aug. 25 and signaled further moves to come after the economy overcame political unrest to grow faster than estimated last quarter.

Nasution, who has a doctorate in economics from University of Paris, Sorbonne, France, became governor on Sept. 1, the 14th in the central bank’s 57-year history. He became acting governor after Vice President Boediono resigned as central bank chief in May 2009 to become President Yudhoyono’s running mate in last year’s presidential election.