Bank Indonesia Keeps Key Rate at 6.5% as Inflation Stays in Control

Muhamad Al Azhari & Dion Bisara | November 05, 2010

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Jakarta. The central bank announced on Thursday that it was keeping its key interest rate at 6.5 percent on expectations that inflation will remain under control. An analyst suggested the move was to stabilize flows of “hot money.”

Bank Indonesia’s decision came a day before the Central Statistics Agency (BPS) releases third-quarter growth data.

Analysts, the Finance Ministry and BI believe the $540 billion economy expanded at a faster pace than in the second quarter.

The bank has been hesitant to hike its interest rate, leaving it at a record low to for 15 months to support growth despite the threat of higher inflation.

“With improving economic performance and easing inflationary pressures, BI concluded the 6.5 percent rate is consistent with its inflation target of 4 to 6 percent,” said Johanna Chua, an analyst from Citigroup.

“It believes it is conducive to maintaining monetary stability while encouraging banks so that accelerating demand growth can be met with sufficient supply.”

Indonesia’s inflation rose to 5.67 percent last month compared with the year before, down slightly from 5.8 percent in September. 

“In a similar tone with last month, BI signaled it will continue focusing on liquidity management measures in the face of strong capital inflows and excess liquidity,” said Helmi Arman, an economist from Bank Danamon.

“This implicitly rules out the possibility of any rise in the very near future.

“With core inflation still at around 4.2 percent in October [far lower than the 5.7 percent headline rate], BI’s tone on inflation appears to be still relaxed.

The risks cited mainly involve supply-side issues of food and seasonal pressures, which is more or less in-line with our own assessment.”

However, Gundy Cahyadi, a Singapore-based economist from OCBC Bank, said: “This is not to say that BI is not, or should not be, concerned about inflation.

"If we consider imports growth as an indication of the strength in domestic demand, we see the likelihood that inflation may surge to 7 to 7.5 percent in the next six months or so.

“If commodity prices were to rise higher in line with a stronger global economic recovery in the latter part of 2011, our expectation should not be ruled out, and we see the need to anchor inflationary expectations going forward.”

Helmi added that BI may have had foreign inflows in mind by keeping the rate steady.

“In a similar tone with last month, BI signaled it will continue focusing on liquidity management measures, in the face of strong capital inflows and excess liquidity. This implicitly rules out the possibility of any policy rate hike in the very near future.”

Indonesia’s key rate stands at 6.5 percent, the highest in the region, making it especially attractive to investors seeking gains.

Raising the rate could draw even more foreign capital to a market already flooded in such funds.

Foreign holdings of Bank Indonesia Certificates (SBIs) have jumped 63.6 percent to Rp 73.4 trillion over the same period, accounting for 32.6 percent of the total SBIs.

Gundy said the third-quarter GDP figures due today were likely to show 6.2 percent year-on-year growth, “setting the course for full-year growth to meet the government’s revised estimate of 6 to 6.2 percent.”

http://www.thejakartaglobe.com/business/bank-indonesia-keeps-key-rate-at-65-as-inflation-stays-in-control/404996