BI may keep key rate despite rising inflation

Inflation may accelerate moderately in January due to higher administered prices, particularly rice, analysts said - and the central bank will likely keep its benchmark interest rate unchanged despite the inflationary pressure.

Inflation this month could increase 0.4 percent from December, bringing year-on-year inflation up to 3.3 percent, driven by rising prices for foodstuffs, mainly rice and sugar, Standard Chartered Bank economist Eric Sugandi said Tuesday.

Year-on-year inflation in December was 2.78 percent, according to the Central Statistics Agency (BPS), the lowest rate in a decade. BPS will announce the official figure for January's inflation on Feb. 1.

"As inflation remains manageable in the first quarter of 2010 and as the current Bank Indonesia *BI* rate level is supportive of the rupiah, we expect BI to keep the rate unchanged at 6.5 percent," said Eric, adding that the rate would help banks to increase lending because of the low borrowing costs for businesses.

BI cut its rate by 25 basis points to 6.5 percent in August and has kept it at that level since September to spur economic growth.

It is estimated the economy will have grown by 4.3 percent last year, and it may increase to 5.2 percent this year on the back of higher business expansion as the global economy begins recovery, BI said.

BI's board of governors will meet on Feb. 4 to determine its policy rate.

Acting Bank Indonesia Governor Darmin Nasution has said the current BI rate is acceptable as inflation will return to its normal level of between 4 and 6 percent this year.

Finance Minister Sri Mulyani Indrawati said the price of rice should be closely overseen.

Rice is the main staple food for 231 million Indonesians.

Deputy Agriculture Minister Bayu Krisnamurthi said the price of rice had risen because of the weather. Rain forced farmers in some areas to delay planting their rice crop, which may delay the harvest season, he said.

But the government has intervened to improve marketing and the supply of rice in areas where the price is high, he added.

"If needed we can intervene in marketing operations in central markets with up to 1,000 tons of rice per day," said Bayu.

Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa said the government should intervene to increase rice supply as inflationary pressures would be higher in the second half this year.

At 4:10 p.m. Tuesday the rupiah fell 0.8 percent to Rp 9,415 per US dollar due to concern China would slow down lending and economic growth, dimming the outlook for regional exports, Bloomberg reported. The local currency earlier reached Rp 9,440, the weakest level since Jan. 4.

Indonesia's foreign exchange reserves rose to nearly US$70 billion last week from $66 billion as of Dec. 31, said BI Deputy Governor Hartadi A. Sarwono, meaning the central bank has more space to intervene in currency markets.