BI keeps rate low at 6.5% to back growth

The central bank on Thursday kept its benchmark rate low at 6.5 percent for the sixth straight month despite the surge in the inflation rate in January in order to support the country’s economic growth.

“The board of governors is confident that inflationary pressure will not yet appear at least until the
first half of 2010. All in all, 2010 inflation is assured to remain in line with the target of 5 percent [plus minus 1 percent],” Bank Indonesia (BI) said in a statement, citing the upcoming harvest season as a determining factor.

The year on year inflation rate rose to 3.72 percent in January, a jump from 2.78 percent in December, due to the rising prices of staple and processed foods, the Central Statistics Agency (BPS) reported.

The monthly inflation rose to 0.84 percent in January from 0.33 percent in December.

BI’s move to hold its rate was expected by analysts. They said BI might start increasing its rate at the earliest in the second half of this year due to possible stronger pressures from higher energy prices.

“We expect BI to increasing the rate in June by 25 basis points,” said Eric A. Sugandi, adding that BI might continue increasing its rate by 25 basis point each month until September, bringing the rate to 7.5 percent.

“In the second half of 2010 we will see stronger inflationary pressures from rising energy prices in the world market that will be transmitted to Indonesia’s economy through non-subsidized fuel prices, higher import costs, and perhaps, subsidized fuel price rises,” he said.

The government is currently revising the 2010 state budget to accommodate changes in the macroeconomic assumptions, notably the Indonesian crude price.

In 2008 the government raised subsidized fuel prices by 28.7 percent on average as the 2008 budget was hit by the surge in global oil prices.

BI said the economy has continued to recover along with the global recovery. Acting BI Governor Darmin Nasution said last month the economy might grow 5.2 percent this year and 6 percent in 2011.

The economy was estimated to grow by 4.3 percent last year, the government said. The BPS will announce the official growth figure on Feb. 10.

Indonesia’s positive growth has helped attract capital inflows into the country, so that foreign exchange reserves rose US$3.5 billion to $69.6 billion in Jan. 31, BI said.

Citi analyst Johanna Chua said BI’s move to keep its rate would create positive market conditions.

“BI’s dovish stance in the midst of other Asian central banks turning hawkish should see sustained demand for Indonesian bonds,” she said.

BI expected the low BI rate could help banks to spur lending to expand between 17 percent and 20 percent this year.

As of December last year lending grew by only 10 percent due to a combination of higher lending rates along with businesses being reluctant to expand in the context of the global downturn.