Bank Indonesia Officials Say No Need to Raise Rates Yet

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Cakrajiya Ciptana (CCi)

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Media : Jakarta Globe		Date : Wednesday, March 24, 2010
Page : B1		Tone : Neutral
Position : Top-Center		Section : business

Bank Indonesia will not review its monetary policy in light of rate hikes by other central banks in the region because it remains comfortable with the outlook for domestic inflation, Senior Depu­ty Governor Darmin Nasution said on Monday.

Darmin said Indonesia's benchmark interest rate "does not have to follow other coun­tries'. We have our own consid­erations and conditions."

He said domestic inflation was expected to remain "on track with the central bank's es­timate "so there is no urgency to review the level of the BI rate."

Deputy Governor Hartadi Sarwono went a step further, saying the central bank may keep interest rates unchanged this ' year as inflationary pressure re­mains benign, Bloomberg re­ported on Monday.

India on Friday joined Aus­tralia and Malaysia in lifting in­terest rates this month. It was In­dia's first rate hike since July 2008, and was meant to fight ris­ing inflation.

The Reserve Bank of India hiked its benchmark rates by a quarter percentage point.

Analysts said the markets feared that more Asian central banks would follow suit after In­dia's move.

"BI appears very comfortable about inflation. We are a little less so," said Johanna Chua, an analyst for Citigroup in Singa­pore. "We are expecting infla­tion at or slightly above 6 percent at the end of 2010, depending on the impact of the electricity tar­iff hike."

Chua said the group estimat­ed that the government's plan to raise the electricity tariff by 15 percent in July would raise the inflation rate by 0.3 to 0.5 per­centage points.

Bank Indonesia has forecast inflation in the range of 4 per­cent to 6 percent this year. Infla­

tion was recorded at 2.78 percent in 2009.

The central bank maintained its benchmark interest rate at 6.5 percent on March 4 for the sev­enth-consecutive month.

On the risk that Bank Indone­sia might fall behind the infla­tion threat in adjusting its key rate this year, Chua said: BI ap­pears very reluctant to hike pol­icy rates and remains very confi­dent about the sustainability of capital inflows. Its tolerance threshold for real policy rates may have even fallen below its usual 100-to-200-basis-points range."

But Chua said Bank Indonesia would eventually have to hike its key rate, with Citigroup expect­ing a hike of 75 basis points this year as one option, and 50 basis points as a minimum.

On the rupiah, Chua said the central bank was likely to let the currency strengthen to a level of Rp 9,000 per US dollar, which she predicted would happen in the second quarter of this year.

"We think BI is more tolerant of IDR appreciation than raising interest rates to temper infla­tion," she said.

"We think near-term momen­tum for the IDR remains posi­tive, targeting 9,000 in the com­ing months."