Lower Oil Imports in Q3-2013 will Support Indonesia's Weakening Rupiah

Indonesia has been experiencing a trade deficit, which is partly the result of rising oil imports in recent years in line with rising domestic consumption of the fossil fuel. The government raised the price of subsidized gasoline by 44 percent and diesel by 22 percent on 22 June 2013 in order to relieve the ballooning budget deficit. However, this measure has triggered higher inflation. In June 2013, inflation stood at 5.90 percent (YoY). Total annual inflation is expected to rise to 8 percent in 2013.

In order to mitigate higher inflation and support the Indonesian rupiah, Bank Indonesia raised its benchmark interest rate by 25 basis points to 6.0 percent in June 2013. One month later, the institution raised its interest rate again to 6.50 percent. Previously, the central bank maintained a historic low BI rate of 5.75 percent for 16 months. It has been speculated that if July's inflation rate will be higher than expected, the benchmark interest rate will be raised again, which will come at the expense of economic growth.

With the notable exception of China, most Asian currencies have weakened significantly against the US dollar in 2013. Indonesia's central bank lets the rupiah depreciate gradually instead of using its foreign exchange reserves to support the currency.

| Source: Bank Indonesia

 

2013	Inflation
January	1.03%
February	0.75%
March	0.63%
April	-0.10%
May	-0.03%
June	1.03%
Total	3.35%

^{Source: Statistics Indonesia (BPS)}

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