Thanks to strong domestic demands.
According to Maybank Kim Eng, on the economic front, Bank Indonesia expects the Indonesian economy to grow by 6.2% YoY in 1Q13, mainly on strong domestic demand, in turn driven by improving purchasing power and consumer confidence.
Maybank also noted that fixed-investment remains strong.. For the whole of 2013, Bank Indonesia now expects the economy to grow in the 6.2-6.6% range, from 6.3-6.8% previously.
Bank Indonesia decided to hold its policy rate (the BI rate) steady at 5.75% in Apr 2013 (the fourteenth consecutive month it has done so since Feb 2012). The decision is in line with our and consensus expectations.
The interest rate is assessed to be consistent with the inflation target of 4.5% ± 1% in 2013 and 2014. Bank Indonesia seeks to strengthen its monetary operations by absorbing excess liquidity in order to suppress short-run inflationary pressure. It will also continue to maintain the stability of the exchange rate in accordance with fundamentals, and encourage the creation of a more efficient foreign exchange market.
Bank Indonesia is looking to boost policy coordination with the government to manage a worsening current account position and minimise potentially volatile food inflation.
Given the uncertain global economic outlook and the fact that core inflation remains subdued, we expect interest rates to be unchanged at 5.75% for the rest of 2013.
However, if the government raises fuel prices in the near future, Bank Indonesia is expected to increase the BI rate by 25- 50bps. It would likely raise the BI rate by 25bps if the government implements restrictions on the use of subsidised fuel.
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