Weak Consumption May Keep Indonesia From Raising Rates Just Yet

(Bloomberg) -- Indonesia’s central bank said it won’t hesitate to raise interest rates to stabilize the rupiah, but that plan faces a hurdle in the form of Indonesians who aren’t spending enough.

Weak consumer spending meant that the average earnings of companies in the Jakarta Consumer Goods Index, the worst performer in the benchmark Jakarta Composite Index this year, was 7.3 percent below analysts’ expectation in the first quarter, according to data compiled by Bloomberg. It was the biggest earnings miss since the second quarter last year.

With consumer spending accounting for almost 60 percent of Indonesia’s economic growth, lackluster sales threaten to not only hamper recovery in Southeast Asia’s biggest economy but also Bank Indonesia’s ability to raise rates. That’s poised to limit the central bank’s options for defending the currency.

Weaker-than-expected inflation for April is seen as a signal that spending power remains frail, according to Taye Shim, head of research at PT Mirae Asset Sekuritas Indonesia. Consumer prices rose 3.41 percent in April, slower than the 3.5 percent pace estimated in a Bloomberg survey.

“The April inflation reading was a disappointment,” Shim wrote in a text message. “Bank Indonesia will have difficulties in finding the argument to raise rates to defend the rupiah amid a prolonged low inflation environment.”

Weak Consumption May Keep Indonesia From Raising Rates Just Yet

Bank Indonesia is open to adjusting interest rates if the pressure on rupiah -- which is trading near a two-year low -- persists and is considering boosting dollar supply through more foreign exchange swap auctions, Governor Agus Martowardojo said on Monday. The central bank also pledged to keep buying government securities from secondary market to maintain market stability.

David Sumual, the chief economist at PT Bank Central Asia, said the central bank should raise rates, starting in the third quarter, but that lackluster credit growth and consumption are complicating factors for policy makers.

“Right now, the demand for credit is really slow, basically flat,” he said. “That’s complicating the decision for the central bank.”

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